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Go for the Goals

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Asset allocation, diversification and rebalancing are components of a great investment strategy that can help smooth out the ride in today’s volatile market place. I look at investing as a long term proposition such as running a marathon, not a get rich quick scheme. The most successful investors I have met spend less than they make and have set goals. Asset allocation and diversification with annual rebalancing can help investors deal with  market conditions and keep them focused on their goals. Multiple asset classes in a well-balanced portfolio work together to dampen the volatility in the overall portfolio, helping it weather changes in market conditions such as rising inflation, changes in interest rates, market psychology or changes in the political winds. 

Asset allocation is merely a broader approach to obtain the correct diversification for an individual investor’s needs. Asset allocation is based on the proven theory that the type or class of security you own is the overwhelming determinant of portfolio return, and is vastly more important than individual security selection or market timing. Selecting the appropriate mix of stocks, bonds, cash and real estate for your individual needs is an important step. Finding the right mix will allow you to pursue the optimal return for the risk level you are willing to undertake. Asset allocation can change over time, depending upon your goals, time frame and risk tolerance.

Once you have decided an appropriate investment strategy - for an example 20% real estate, 10% cash, 30% bonds and 40% stocks - I would recommend having a disciplined rebalancing strategy. Market activity can shift the percentages of your portfolio you have committed to each asset class. Perhaps on an annual basis you could review your statements, comparing your current allocation to your target allocation. Any allocations off by more than 5-10% would require rebalancing. Another approach is to reallocate when your portfolio moves away from your target allocation by more than 5 to 10%. A third approach would be to reallocate based upon your views about current market conditions. Instead of having a specific percentage for each asset class you might have a target range. For instance you might allocate 10-35% of your stock portfolio to small-cap stocks. Depending upon your views of the market, you might want to allocate near the low or high end of that range. 

Having a strict rebalancing strategy would have served you well in the large-cap growth run of the late nineties. As the large-cap stocks soared they would have gained a larger percentage of your overall portfolio. Rebalancing would have forced you to sell your best performing asset class and reallocate back to bonds, value stocks, small cap stocks, cash and real estate. 

To succeed in investing, you don’t need to be an economic guru. You are more likely to succeed if you take a long-term approach with a disciplined diversification strategy. Your reward is to realize your goals: sending kids to college, retiring comfortably or securing a legacy for your family or a charitable organization.

Nancy Hadley is an Investment Representative with D.A. Davidson in Sandpoint.

 

 

 

 

 

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Nancy Hadley

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investing, Market Outlook, asset allocation, diversification, rebalancing

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