Clients often ask how their money should be invested. Should the money be invested in stocks, bonds, real estate? All the above? Well, we’ve all heard the expression, “Don’t put all your eggs in one basket.” It is not surprising that this applies to your financial investments as well. Your assets need to be allocated and how they should be allocated is the subject of this article. 

Asset Allocation is a well-known and understood concept in the world of investing. It is widely used to help determine how your money should be divided across different asset classes which include cash, stocks, bonds, insurance, and real estate. Your short, intermediate, and long-term investment goals should have an influence on these decisions. Are you investing for your retirement, saving for a down payment on a house, investing for your children’s college tuition or building wealth for the long term? One of the most important discussions you should have with your financial advisor is to help them to understand your investment goals. Always remember, this is your money, not the advisors. Once this is understood these goals will influence and determine your asset allocation decisions. 

Assessing your risk tolerance is a very important part of determining in which areas you should invest. How much risk are you willing to take on in your investment portfolio? Higher risk investments may offer higher potential returns, but they also come with a greater risk of loss and volatility. This discussion must include, but not be limited by, helping you determine your level of risk tolerance. 

Consider your time horizon. The length of time you have to invest should influence these decisions. If you have a longer time horizon (let’s, say you’re in your 30s), you may be able to take on more risk in your portfolio. However, as you hit your 50s and 60s you may want less risk. Some of the most important considerations are your age and where you are in your life cycle.

Diversification of investments can help to reduce risk and volatility. In many cases, it can help improve adjusted returns by investing in bonds, stocks, insurance, and real estate. Diversification is a well-known technique that should be used to reduce the overall risk of your portfolio and can help smooth out longer-term returns by reducing volatility. 

Each asset class has its own risk and return characteristics. Once you have formulated a general strategy, then it’s appropriate to determine the percentages of stocks/bonds/real estate, cash and other assets that you may own or want to own such as jewelry and art. The right mix will be arrived at by having this conversation with your advisor.   

Over the last year as interest rates have risen at the fastest pace in decades, even cash and short-term cash management tools like interest-bearing deposit accounts, money market funds, U.S. Treasury Bills and CDs have come back into favor as an asset class to deliver extremely compelling returns versus traditional checking and savings accounts. If managed correctly this could add an additional 4-5% in return on idle assets that have been yielding zero or near zero for years.  

Once you have assessed your investment goals, risk tolerance, and time horizon, you can determine your target asset allocation. A sample asset allocation could be something like 40% equities, 40% bonds and 20% real estate. This is meant as an example only and not something that necessarily applies to you. Decisions related to your specific percentages is what you and your advisor should determine. Your finances can and should be reviewed regularly to make certain you are aware of external forces that may suggest a shift in the investments, as well as to make sure that the investment plan is working towards accomplishing your stated goals. These goals are always subject to change, which is one of the reasons for ongoing, frank discussions between you and your advisor. Also, it’s important to monitor your portfolio regularly and be prepared to adjust as needed because over time your portfolio may drift. For example, as you age your allocations can easily change from higher risk to a more conservative approach so rebalancing your portfolio is very important. 

In many cases, a great deal of your funds are invested outside of tax-deferred accounts such as IRAs (Individual Retirement Accounts) and pensions. Therefore, in these types of investment accounts, there will be times that you are tempted to sell because the investment landscape frequently changes due to external forces such as higher interest rates, inflation, and recently, a pandemic. These types of market conditions can be nerve-racking and cause you to want to sell but you must carefully consider this action because doing so will most likely cause a tax event. An advisor should always make certain that you are aware of how you will be taxed and how this will impact your outcome. 

Monitor your portfolio performance. Regularly monitoring your portfolio performance can help you make adjustments as needed. Be a partner with your advisor. Be clear about what you want the outcome to be and ask questions. An experienced advisor will answer your questions and then be able to recommend a plan that will achieve your goals. 

And finally, stay informed. The investment landscape is always changing, so it’s important to keep up with market trends and economic conditions that may impact your portfolio. One of the ways to do this is by watching financial news programs, reading financial publications, and setting up bi-annual meetings with your advisor to review your portfolio.