When it comes to finance, organization might be the most crucial factor needed to maximize your capital. You don’t just randomly save money here and there—you commit to a savings goal and do your best to maintain it. Likewise, you don’t just buy the hottest stocks on Yahoo Finance and call it a portfolio. Organization of investments is an entire discipline unto itself—in the world of finance, it’s known as asset allocation. Let’s dive into some common asset allocation strategies for investors.

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.

What is Asset Allocation?

Asset allocation refers to how we organize the investments that make up our portfolios. In many ways, the financial markets are just like supermarkets. You aren’t grabbing the first 20 items you see off the shelf at Costco and calling it grocery shopping.

When it comes to organizing your investments, you need to employ many of the same strategies used when shopping. You have your core items, your needs for this specific moment, and maybe a treat or two that just make you feel good. Of course, asset allocation is a bit more complex than just remembering if you need milk or not.

Types of Assets

When building your portfolio, you need to divvy up your funds amongst the various asset classes based on your personal timeline and risk tolerance. When discussing which assets to allocate funds to, most investors are discussing one of these classes:

Equities. The most common sight in your portfolio will usually be some combination of stocks, exchange-traded funds (ETFs), or mutual funds. Equities enable you to leverage the profits of operating companies to various levels of risk. ETFs and mutual funds are safer than individual stocks, but all equities carry risk. Deciding how much exposure you want to the stock market (and in which areas) is the fundamental question of asset allocation.
Fixed Income. Bonds are an important part of your portfolio thanks to their correlation with stocks. In most environments, bonds balance the risk inherent in equities since bond prices tend to rise when equity prices fall.
Real Estate. A house or income property might not be listed in your brokerage account, but real estate is still an asset and remains an important piece in the portfolio of most Americans. Additionally, real estate can help diversify capital away from financial markets.
Cash. Money is an asset, too! Cash isn’t just dollar bills either, but also funds in savings accounts, certificates of deposit, and other FDIC-insured vehicles. You won’t earn much on cash, but you also aren’t risking anything by holding it, other than loss of purchasing power over time due to inflation. Cash is good, but you don’t want to sit on all your money—you work hard for it, so it should work hard for you.

Crucial Factors Used to Determine Asset Allocation

Asset allocation isn’t a one-size-fits-all conception. Two similar-aged people with identical incomes might still have drastically different goals and risk tolerance levels. To determine the best asset allocation techniques for your portfolio, you’ll need to ask yourself the following questions:

What is My Timeframe?

If you’re a young person just entering the workforce, you have lots of income-earning years ahead of you and can devote more capital to stocks. Day-to-day market gyrations don’t matter when your timeline is measured in decades, because you only care about long-term performance. Risky assets like growth stocks are fine for a young investor, but someone older with a shorter investment horizon might prefer a portfolio with dividend-paying stocks accompanied by income-producing bonds.

What is My Risk Tolerance?

Let’s play a game—you can choose between two basketball shots. If you hit or miss a free throw, you’ll win or lose $10,000. If you hit or miss a three-point shot, you’ll win or lose $200,000. Which shot would you choose? Or would you even play the game at all? It’s a hypothetical question, but it’s similar to the question investors must ask themselves about risk management. Can I tolerate the drastic ups and downs of growth stocks? How about the more moderate gyrations of dividend or blue-chip stocks? Or maybe you don’t want to risk anything at all and find comfort in the security of bonds and cash. You’ll need to assess your risk tolerance before allocating any capital.

What Are My Goals?

Everyone invests for different reasons—some are saving for retirement, others are trying to grow their wealth, and some just want to try to get rich quick. Your goals as an investor play a huge role in determining your proper asset allocation. If you want to get rich, you probably have no use for bonds. And if you want a stress-free retirement savings plan, buying a ton of tech stocks probably isn’t suitable.

Putting It All Together

Determining the proper asset allocation requires us to ask three crucial questions about timeframes, risk tolerances, and investment goals. The various asset classes each have different levels of risk, and organizing them into the most suitable basket for each individual is the goal of any good investment advisor. If you want to learn more about targeted asset allocation strategies based on unique circumstances, contact your financial planner with your specific concerns.

Work With an Experienced Financial Advisor

If you have any questions about asset allocation strategies for investors, reach out to a team member from Good Life Financial Advisors of Mount Pleasant today.

Disclosure

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk, including loss of prinicpal.

Asset allocation does not ensure a profit or protect against a loss.