Asset allocation and diversification are often considered to be the foundation of prudent investing. Yet when dramatic market fluctuations occur, it’s easy to make impulsive changes that don’t align with long-term goals.
“Bull and bear markets can be emotional roller coasters,” says Rob Haworth, our Senior Investment Strategist. “But your long-term plan is there for a purpose, and it is our job to help our clients stay the course.” However, it is important to consider adapting your asset allocation to market shifts. Work with your portfolio manager to make strategic decisions that may help you meet your goals while maintaining an acceptable level of risk. Consider these five steps we believe are necessary for effective asset allocation.
Step 1: Set Strategic Goals
The first step in planning your asset allocation and diversification is defining your long-term financial goals — saving a specific amount by a certain age or creating an income stream that will last 20 years, for example — then creating an investment strategy to work toward those goals. “You need to have a goal so you can evaluate whether your portfolio is working for you,” says Clay Webb, our Head of Asset Allocation.
Setting goals can potentially help you avoid impulsive decisions in reaction to a volatile market. “Without a clear goal, it’s easy to get frustrated by how assets are allocated during a bad year,” Webb says. “If the market is excessively strong or weak, investors often want to push back on their plan. But it’s important to remember what you are trying to accomplish in the long term.”
From there, your portfolio manager can help you identify an appropriate balance of assets for your investment objectives and determine your acceptable level of risk. For example, someone with $5 million to invest over 20 years may be willing to withstand more volatility than someone with the same amount but who needs it to generate an annual income, Webb says.