Strategic asset allocation is a common investment strategy advisors use to help clients maintain their preferred mix of assets in their portfolios. While the concept might sound simple, deciding how to allocate your investment capital can get complicated. Here are answers to common questions investors have about strategic asset allocation.
WHAT IS STRATEGIC ASSET ALLOCATION?
Strategic asset allocation describes the process of creating a well-balanced and diversified portfolio. The goal is to spread your investment capital across different types of assets so you're not overly invested in any one place.
You and your advisors can work together to set targets for how much of your portfolio should be allocated to various asset classes. Comparing various asset allocation models lets investors see what kinds of returns and risks they may expect from each model before deciding which one to use.
We sometimes use percentages when we talk about asset allocation models. For example, some investors use a 60/40 allocation, which typically means their portfolio consists of 60 percent stocks and 40 percent bonds. An 80/20 allocation might be preferable for someone who wants a stock-heavy portfolio. Or, portfolios might be referred to by their objective, such as Moderate, Moderate Growth, or Growth.
Once we identify the optimal allocation, the next step is to choose the assets we want to invest in from each class. There are many ways to approach this, but your investment advisors can help you explore your options.
WHAT KINDS OF ASSETS CAN BE CONSIDERED AS PART OF STRATEGIC ALLOCATION?
The short answer is all of them. Stocks and bonds are traditionally the two asset classes that comprise most American portfolios, but even under those broad headings are a number of additional decisions to be made. Stocks, for example, can mean large company stocks, small companies, international, emerging markets, and more.
Bonds, too, can mean a variety of different types of fixed income. Including a variety of these assets can reduce the overall risk of the portfolio, and can potentially increase returns as well.
Our approach is to include stocks, bonds, and alternative investments like gold, real estate, and commodities to build portfolios in an attempt to provide the best risk/reward profile that we can for our clients.
We spend time throughout the year monitoring not only how each asset class is performing, but also how each specific investment in those asset classes is doing against their peers.
HOW DO I MAKE THE RIGHT DECISIONS ABOUT STRATEGIC ASSET ALLOCATION?
The ultimate purpose of strategic asset allocation is to make sure your portfolio is designed to meet your long-term financial goals. Ultimately, it’s your financial plan that determines the right portfolio for you. Some investors can afford to take less risk because they don’t need a lot of growth over time to make their plan work, while others need a slightly more aggressive portfolio to make their goals a reality.
We use your plan to guide our decisions about the appropriate level of risk and reward that is right for you, and design an investment strategy accordingly.
HOW OFTEN SHOULD MY PORTFOLIO BE ADJUSTED?
Once your initial allocation is set, our goal is to maintain it over time. As the various investment markets fluctuate, so too will your overall portfolio allocation. Periodically we will rebalance your portfolio, which basically means that we’ll buy and sell different investments to get it back to that original allocation target. How often this happens is entirely dependent upon how much the markets move. In some years we’ll need to rebalance a number of times, and in others we may only need to do it once.
In addition to rebalancing, we also revisit your overall allocation as we move through your financial plan. As clients get older, for example, we may want to adjust their risk level. At that point, we would update your financial plan and make a decision about what changes we may want to make to our investment strategy.
LET SACHETTA HELP YOU FEEL CONFIDENT ABOUT STRATEGIC ASSET ALLOCATION.
Sachetta's wealth management advisors meet every client exactly where they are. We strive to make clients feel comfortable, confident and well-informed about every investment decision, from experienced investors to young professionals just starting to build their portfolios. We're here to guide you through each step of the strategic asset allocation process. Contact us today!