Successful asset allocation will cater to the risk tolerance and goals of a client based on past performances while seeking gains in an uncertain future; this calls for a mixture of art and science. We believe that successful asset allocation is based on rigorous statistics, but as with any other statistics, it’s 20/20 retrospective vision. Proper diversification can help to make the future performance slightly more predictable, but as market conditions unfold, the appropriate rebalancing or reallocation may not always be obvious, especially to a computer. Continue reading...
Asset allocation is theoretically the best way to control the return you experience, through diversification and rebalancing. Asset allocation theories provide you with mechanisms to diversify your money among various asset classes, such as stocks, bonds, real estate, commodities, precious metals, etc. The benefit of asset allocation is twofold: first, nobody knows which asset class will perform better at any given time, and second, various asset classes are not entirely correlated or have a negative correlation, which provides a hedge. If one asset class appreciates significantly, the other might not, but, if the allocation is done correctly, this may be exactly what the investor was looking for. Continue reading...
How you allocate your assets in retirement depends on your goals and objectives for the assets, and the amount of growth you need to reach them. Your asset allocation also depends on your age and risk tolerance, all of which need to be factored-in each year when allocating your portfolio. The very first step in deciding an asset allocation is to determine your total level of liquid assets, what your desired level of growth and/or income is over long stretches of time, and your tolerance for risk/volatility. Most investors need more growth over time than they think, and often times it results in investors under-allocating to stocks or other risk assets. Continue reading...
At the highest level, Asset Allocation refers to an investor’s decision of what percentage to allocate to stocks, versus bonds, versus cash (and cash equivalents), versus any other asset class (commodities, alternatives, real estate, etc…). It is believed that the asset allocation decision is responsible for the majority of an investor’s returns. In other words, there is a direct correlation between an investor’s long-term return and how long - and to what percent - they owned stocks over their lifetime. Continue reading...
The single best control mechanism over the performance of your investments is the maintenance of an asset allocation strategy. When testing various methods of predicting and controlling returns in a portfolio, researchers found that having and maintaining an asset allocation strategy was the method that reaped the most predictable returns – with 80-90% accuracy. Asset allocation is the distribution of various asset classes and investments into a portfolio mix in a deliberate way to gain specific amounts of exposure to each investment. It is a practice used to diversify and manage risk. Asset Allocation is a dynamic process; it’s not something you do once and forget about. Continue reading...
By law, your plan administrator (employer) must allow you to change your allocation at least quarterly, but most plans allow for more frequent changes. Generally speaking, you can change your allocations as often as you need to with no commissions or fees; that is, up to a point. Many plans start to impose fees after about the 10th reallocation, and partially this is meant to discourage over-trading. Continue reading...
An asset mix is the blend of major asset classes in a portfolio, which should be constructed based on the risk tolerance, time horizon, and goals of the investor. A common example of an asset mix is the 70/30 stock-bond mix, where 70% of the assets are invested in stocks and 30% in bonds. “Mix” is one way of describing the asset allocation of a portfolio, but it also describes the practice of diversifying among asset classes. The core asset classes that most people consider are stocks, bonds, cash equivalents, real estate, and commodities. Continue reading...
Arriving at the appropriate asset allocation is not very easy to do by guesswork, so we’re here to help. There is no such thing as a mix of assets that is right for everyone. It depends on your age, employment situation, the size of your investment portfolio, your objectives, time horizon, risk tolerance, income requirement from your investment portfolio, tax bracket, and many other factors. Programs and algorithms can help you significantly when you plug some of these variables in, but it is still wise to apply some scrutiny and a human touch. Continue reading...
There are different methods and theories about rebalancing, and the answer is basically “it depends.” There is no set rule for the frequency of rebalancing your portfolio, and any generic rules that exist do not necessarily apply to or predict the performance of your particular portfolio. If you’re not very familiar with it, rebalancing is the redistribution of gains from the winning areas of your portfolio to the other areas. Continue reading...
The more time you have to invest, the more room you have to make mistakes, wait-out downturns, and to experience the power of compounding interest. As you get older and need to draw income from investments, things change. The answer is relatively simple: you can afford to be very aggressive when you’re young, and gradually become more and more conservative with your investments as you grow older. Generally speaking, stocks are considered risky investments, while bonds are considered less risky, so a person’s portfolio mix from age 40 to age 80 might go from 80 stocks/ 20 bonds to 50/50 or even 20 stock/ 80 bonds depending on his or her preferences and the market conditions. Continue reading...
Investing in commodities has lately become accessible to even small retail investors via ETFs. There are now literally hundreds of different commodity ETFs, linked to various individual commodities and baskets (such as agricultural baskets, commodity indices, etc.) These instruments are very complex and sometimes do not reflect the behavior of the underlying commodity. While investing in commodities may significantly diversify your portfolio, it requires profound knowledge of the behavior of the underlying assets. Continue reading...
Generally, you should choose an allocation that makes sense for your situation. There are many ways you can choose to invest, but there is no definite answer. General rules focus on diversification of assets and strategies that change with age. Many brokerage companies will have questionnaires and model portfolios that can point you in the right direction. The principles you use to invest your IRA assets are no different from principles you use for any other investments: time horizon, risk tolerance, and your intentional use of the money will all help you arrive at strategies that will be appropriate for you. Continue reading...
All of the investments held by an individual or mutual fund or other entity are referred to as that person or entity's portfolio. These investments can range from securities to cash to real assets held for the purpose of preservation, growth, or income; essentially anything that is part of a long-term financial strategy that is held separate from daily operations and cash flow can be considered part of a portfolio. The gains and losses of all the singular investments held are totaled up to find the overall return of the portfolio. Continue reading...
Diversification is intended to reduce the volatility of price movements in individual securities, but many people are not sure what proper diversification looks like. It depends. You should definitely have exposure to at least two asset classes: equities and bonds. Within each asset class, diversification is also important. In your equity portfolio, you should have exposure to stocks with various capitalizations (such as Large Cap, Mid Cap, and Small Cap), various geographical areas (such as the Europe), Developing Markets, and Emerging Markets. Continue reading...
401(k)s can offer many options for investment, but they generally only offer 15 or fewer in each plan. Investment options in your 401(k) are completely determined by the agreement between your employer and the custodian. Therefore, you’re limited to the investment instruments selected for you. The majority of 401(k) plans will offer fewer than 15 investment options, which are generally part of prepackaged 401(k) products from major broker-dealers or mutual fund companies. Large companies will frequently also offer stock of their company within the 401(k) plan architecture. Continue reading...
There are many ways to diversify a portfolio, but all of them center around a strategy of owning different types of asset classes. For equity investors, perhaps the best strategy for diversifying a portfolio is to own companies from different sectors in different style categories, maybe even across the globe. The S&P 500 has ten different sectors, and a very broadly diversified portfolio should have exposure to each one in some capacity. Continue reading...
Bonds can provide consistency and balance to a portfolio otherwise comprised of stocks. In the long run, stocks are generally associated with a higher yield, but as we know, higher returns mean higher risks. Bonds are seen as a safer, yet lower-yielding investment. Bonds offer a spectrum of risk and return potential, however, and various kinds of bonds and bond funds can be used in various market climates and portfolios. Continue reading...
Not every plan will have an advisor ready to give you personalized attention, but some do. For those that don’t, there are plenty of resources out there. There are countless sources out there, all offering “the best” information about how to manage your 401(k) investments, but very few offer a smart, logical, and practical approach. Most of the time, the advice you get will tell you to diversify among various asset classes, but will never give you specific allocations. It is simply essential to actively monitor your investments and take the reins of your financial future. Continue reading...
Stocks are inherently risky, and an investor has risk of capital loss. As with most things in life, no risk yields no return. Theoretically, the greater the risk, the greater the potential return. A new company which has not established itself yet will have a decent chance of crashing and an investor can lose all invested capital. But — what if it takes off? Your potential gains in such a situation are potentially vast. There is a point when the rate of increased return per degree of risk begins to slow down. Continue reading...
There are probably more important things you can do with your time than find a place to store your suitcase full of gold and hover over it like a mother hen. But it may be worth it to you, since owning shares of a gold ETF is not the same as owning actual gold. Gold ETFs work by holding some amount of gold in trust and then selling shares of the fund that owns it. There is a significant discrepancy between the dollar value of the gold which is held and the total value of the shares which are sold, however, and if there were ever a “run” on the fund, no one would be able to actually get gold bricks out of fund managers. Continue reading...