Asset Allocation:
A Peace of Mind Investment Strategy
Are volatile markets worrying you, perhaps even keeping you awake at night? If you're like most investors, your goal is to accumulate enough wealth during your working years to allow you to enjoy the lifestyle you want once you retire. But your life doesn't have to be filled with sleepless nights worrying about which investments to buy and which ones to dump. Asset allocation can help take the fear out of investing for your financial future.
Asset allocation simply refers to an investment strategy that focuses on dividing investments among different kinds of assets such as stocks, bonds, cash or real estate, for example to optimize your risk/reward tradeoff.
Asset allocation is the real life example of the old phrase, don't put all your eggs in one basket. In fact, many experts believe that asset allocation is the single greatest determinant of investment performance. This concept has received considerable attention and as a result, many products are available in the marketplace. Single funds or managed portfolios are often designed to accomplish the goals of asset allocation within a single investment product.
The theory is that by having your money invested in a variety of assets, which respond differently to market conditions you stand a better chance of maximizing growth and minimizing the ups and downs of the market. How much you invest in each area completely depends on which asset allocation strategy works best for you.
Your asset allocation strategy will depend on your own investment personality, your financial goals and your risk tolerance. If you are young and years away from retirement, you are probably more interested in maximum growth of your portfolio. If you also have a high tolerance for the ups and downs of the equity markets, you're a good candidate for an asset allocation strategy which is heavily weighted in equity funds or investments. Even if you experience a few down years in the market, you'll have time on your side to reap the benefits of the up years.
On the other hand, if you nearing retirement, you may be more interested in protecting the wealth you've accumulated. Your tolerance for risk may be relatively low. But age is not always a reliable indicator.
Many older investors have a high tolerance for risk, and many younger investors have investment goals which require a low tolerance for risk.
By blending different mixes of stocks, bonds and money market securities, investment management firms have developed various asset allocation funds or portfolios to meet the needs of the different types of investors. Low-risk funds typically consist of a higher percentage of money market and bond investments. Returns are lower but are more predictable (therefore, less risk). Conversely, high-risk asset allocation funds are likely to invest heavily in stocks in order to maximize the potential for return.
Look for the right asset allocation product to meet all your personal goals. For example, Elliott & Page offers both maximum growth and balanced asset allocation portfolios but also offers a unique tax managed portfolio. This last portfolio is a good example of asset allocation working to achieve the specific goal of tax-management.
It can make good sense to take advantage of these structured asset allocation funds as a team of investment professionals monitors the funds. They use computer models to watch how various investment components interact and contribute to the overall performance. These models help to identify the mix of asset classes and investing styles that is most likely to provide the greatest long-term return for each target level of risk and in some cases, fulfill other financial objectives.
Your own best asset allocation strategy begins with a visit to your financial advisor, whose expertise will be invaluable to you. Revisit your strategy regularly, and build a plan to keep it on track. Whatever your objective, a good asset allocation strategy can help you reach your financial goals... and give you the peace of mind you need to sleep well at night.
