6 Top Asset Allocation Strategies
by Gabriel Lewit
Finding the right balance of anything in life can feel like a challenge, that is until you have plenty of practice and experience at something to get it just right. The same applies to asset allocation: the process of dividing your investments into different categories based on asset class, which requires rebalancing here and there.
A financial advisor with the credentials to help you manage risk and achieve a favorable return over time can be your best bet as a long-term financial ally. The right portfolio manager can steer you from the pitfalls of losing money and navigate you toward protecting savings, mitigating taxes, and building wealth.
In this article, you’ll explore these six top strategies to help set up your asset allocation plan so that it meets your needs.
- Know your financial goals
- Choose the percentage of stocks, bonds, and cash that match your goals and risk tolerance
- Set investment allocation targets for each category
- Check your investments periodically, and rebalance if your asset allocation strays from your plan
- Rebalance when new money is added to your account
- Avoid making investment mistakes based on emotion or impulse
Strike the right balance of asset allocation with a financial advisor in Buffalo Grove, IL, at SGL by asking us how to get started.
1. Know your financial goals and act on them
Knowing your goals versus creating a comprehensive plan around your goals can make all the difference in helping you choose the right investments.
If you don’t have a plan, it’s easy to get lost in the day-to-day and not realize that you could be doing more with your money. If you want to create financial success, you need to know what that looks like, right? That might mean having enough money so that you never have to work again, or it might mean having enough funds saved for a comfortable retirement. Whatever your goals are, share them with a CERTIFIED FINANCIAL PLANNER™ at SGL who will help you stay focused on strategic asset allocation and keep you motivated through economic uncertainty.
By taking the time to explore your unique financial situation along with your aspirations, our team of experienced financial advisors can see how far away from achieving each goal you are. With the financial insight and in-depth knowledge of your preferences, it’s our responsibility as a fiduciary financial firm in Buffalo Grove, to craft an evolving and unique asset allocation strategy that aligns with all aspects relative to you.
2. Choose the percentage of stocks, bonds, and cash that match your goals and risk tolerance
The first step in asset allocation is to decide how much of your portfolio to put into each category. You can choose a mix of stocks, bonds, and cash that matches your goals, risk tolerance, and time horizon.
- For example, if you’re saving for retirement which is about ten to 20 years away, you might want to have more of your money invested in stocks.
- If you’re saving for your child’s college tuition or other long-term goals where there is less time for compounding interest on investments (like just five years), it might be wise to shift more assets into lower-risk bonds or cash assets. That way, even if the market takes a dive before your goal date arrives, no one gets hurt.
A financial advisor in Buffalo Grove, IL, can be your most reliable resource when it comes to determining these percentages. For those nearing retirement, be sure to rebalance your portfolio with guidance before reaching your golden tears, as your percentages likely need to shift to less volatile assets.
3. Set investment allocation targets for each category
The first step to setting your asset allocation targets is determining what you want to achieve. This can be done by setting a goal for each of the three categories: stocks, bonds, and cash. Once you have decided on the goals for each category, it’s time to decide what allocation those goals should be invested in.
The next step is to choose an appropriate asset allocation that meets your risk tolerance and financial goals.If you don’t already have a target allocation in mind, here are some suggestions from experts:
- For most people, 60% stocks/40% bonds (this is known as “60/40”) is a good place to start because it reduces volatility while still providing exposure to equity markets.
- Some experts recommend having no more than 70% of one’s portfolio in stocks while others say 80%. It depends on how aggressive or conservative you want your portfolio to be.
- You may find that you need less than 40% in bonds if you have other sources of income besides your retirement savings accounts.
4. Check your investments periodically, and rebalance if your asset allocation strays from your plan
The best way to keep your investment strategy on track is by checking your investments periodically, and rebalancing when necessary. Regularly reviewing your portfolio allows you to make adjustments when needed so that it stays in line with the plan you devised at the beginning of your investment journey.
There are two main types of rebalancing:
- Rebalancing on a schedule — this method involves altering an asset allocation based on market conditions or other external factors, which could be defined by a specific date (for example, every three months).
- Rebalancing off-schedule — this method involves buying and selling assets as needed in order to maintain an optimal mix between riskier investments (like stocks) and safer ones (like bonds).
At SGL, we will keep you informed and let you know when rebalancing is needed. This is where working with a qualified financial advisor with credentials to back up your financial success truly pays off.
5. Rebalance when you add new money to your account
Another way to improve returns is by rebalancing your portfolio when new money is added to your account. This means buying and selling assets in order to get your allocation back on track. For example, if you have 10% of your portfolio in stocks and 90% in bonds, then when the stock market falls 30%, you’re going to increase the number of shares you own—and vice versa for a gain.
Rebalancing reduces risk because it prevents any one asset from dominating your portfolio and thus increases diversification. It also helps keep things on track with respect to each individual asset’s expected return.
For example, while an investor may expect stocks to return 8% over time (based on their historical average), they might actually only earn 3% during one year due to volatility or poor performance by certain stocks. Rebalancing can help make up some of this lost ground by buying more shares when prices are low and fewer when prices are high.
6. Avoid making investment mistakes based on emotion or impulse
Don’t buy high and sell low: This is the most basic rule of investing, but it’s also one of the most common mistakes people make. If you’re not excited about an investment and don’t think it will do well in the long term, don’t buy it.
Don’t invest in something you don’t understand: It seems simple enough, but many people make this mistake. Before you start buying stocks or bonds (or any other type of security), take some time to learn about them so that when someone asks what “futures” are, for example, you’ll feel comfortable and confident explaining them.
These asset allocation strategies can help you make better decisions about what to invest in
Asset allocation strategies can help you make better decisions about what to invest in, when to invest, and how much to invest. With strategic asset allocation, you can feel confident in taking a long-term approach to set your portfolio mix. Retirement years are a common time for investors to use this strategy because less risk is often preferred.
Work with a financial advisor in Buffalo Grove, IL, at SGL to structure your portfolio with care.
There are many ways to structure your portfolio, but we believe the most successful investors will be those who stick with a consistent strategy over time. The bottom line is that investing in the right equation will determine your unique level of success. These six asset allocation strategies can help you make better decisions about what to invest in.
Just as you must work effectively with your financial advisor, you need to know what amount should be allocated to each category within your asset classes so they too can work in unison!
Give us a call today to begin reassessing your asset allocation; we are here to focus on you and your success as a fiduciary in Buffalo Grove, Illinois.