Asset Allocation is a popular investment strategy where an investor spreads investments into different asset classes in such a way that they achieve a desired risk/return outcome. Most of us are familiar with the saying “don’t put all your eggs in one basket”, this phrase speaks directly to Asset Allocation. Since investors have unique time horizons, investment objectives and risk tolerance levels, utilizing an Asset Allocation strategy can help them create a portfolio appropriate for them.
An investor following this strategy will typically diversify their investments into three primary Asset Classes:
Cash – Lowest risk, lowest reward and serves as a cushion to offset poor fixed income and/or equity market performance. It can also be deployed quickly and easily to take advantage of investment opportunities.
Fixed Income – High quality fixed income investments generally pay a fixed rate of return and provide investors with a form of a “known” investment return with minimal risk of loss if held to maturity.
Equities – Also known as “stocks”, equities have the highest risk and highest reward of the three asset classes. Over the long-term, the equity asset class will be responsible for a significant percentage of a portfolios gains.
While most of today’s media outlets focus on individual stocks and what an investor should be buying NOW, the primary factor that determines a portfolio’s risk and return is HOW the investments are allocated1,2.
WARNING: Buying 30 different stocks is not an exercise in Asset Allocation. Yes, different industries perform better in certain economic cycles, however, they all belong to the Equity asset class.
LINK strongly believes that investing in multiple asset classes helps reduce portfolio volatility (risk) and better positions an investor for long-term success. Determining what your asset allocation should be can be a difficult and complicated process. Our proprietary investor questionnaire and scoring system will help us assist you in determining an Asset Allocation appropriate for YOU, based on your investment objectives, risk tolerance and time horizon.
Notes on risk: All investing is subject to risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or protect against losses in a declining market. There is no guarantee that any given asset allocation or mix of securities will meet your investment objectives or provide you with a given level of income.
1. Brinson, Gary P., L. Randolph Hood, and Gilbert L. Beebower, 1986. Determinants of Portfolio Performance. Financial Analysts Journal 42(4): 39–48.
2. Scott, Brian J., James Balsamo, Kelly N. McShane and Christos Tasopoulos, 2017. The Global Case for Strategic Asset Allocation and an Examination of Home Bias. Valley Forge, Pa.: The Vanguard Group