Asset allocation is a critical component of financial planning, so clients must receive clear and concise information on how it helps you. Asset allocation is an investment strategy that seeks to reduce investment risk while maintaining a desired rate of return by spreading an individual’s investments over several asset types. It takes advantage of the tendency of different asset types to move in different cycles and thus smooths out the ups and downs of the entire portfolio. Stocks, bonds, and cash are the investments normally used. Depending on individual needs or preferences, other asset types may also be included.
Asset allocation does not guarantee a profit or protect against a loss in declining markets. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio or that diversification among asset classes will reduce risk.
A Personal Choice
There is no single asset allocation model to fit every investor or for every stage of a person’s life. Since The Noles Group believes heavily in personalized strategizing, we like to remind clients that asset allocation decisions are highly individualized decisions and involve carefully answering several key questions:
- Investment goals: Why are you investing? Is the primary need for income, to pay current living expenses, or as a source of emergency funds? Or are you accumulating money for a future need?
- Time horizon: When will the money be needed? At retirement, or sooner, to send a child to college, for example?
- Liquidity needs: How quickly do you need to be able to turn your investment into cash?
- Risk tolerance: How comfortable are you with the inevitable ups and downs of the financial markets?
- Tax impact: How will the investments affect your tax situation?
- Economic conditions: Inflation, interest rates, and the state of the economy are essential factors to consider.
- International exposure: How comfortable are you investing in foreign markets?
Although no guarantee of how an investment may perform in the future, an analysis of historical data can provide information about the levels of risk and return for each investment type being considered, these historical values are then used as a guide to structuring a portfolio that matches the investor’s individual goals and overall risk tolerance level.
Staying Flexible
Over time, financial markets and an individual’s goals and the situation will change. Periodic reviews with us are a must so that we can stay flexible and adjust allocations as your life changes. Asset allocation is just one component of a comprehensive financial strategy.
