Let’s face it: there’s no shortage of ideas for how you should invest. On any given day, a review of various financial pages will serve up a smorgasbord of different suggestions for the best way to organize your investments. In fact, there are more ideas floating around than any single investor could probably ever hope to implement.
Maybe this is one reason why so many investors have a hard time sticking with a consistent, long-term strategy. When every other article you read claims to have the secret to “inflation-proof your portfolio,” to “protect your finances from the next crash,” or lists “the ten stocks you have to buy now,” staying committed to a long-term financial strategy can seem like an idea no one really believes in.
But we believe that portfolio construction doesn’t have to be that difficult. Nor do we recommend following the “guru of the day” or attempting to time the markets based on the predictions of prognosticators. As a matter of fact, years of financial research and data indicate that certain types of assets exhibit traits or dimensions that have historically proven to capture available market returns over the long haul. Aligning your portfolio to take advantage of these dimensions in a way that matches your investment goals can enable you, over time, to achieve superior returns while avoiding the expense of frequent trading or excessive management fees.
The key to this strategy, of course, is proper allocation of assets: obtaining the proportional balance among the various types of assets you own that positions you to achieve your most important financial goals. Let’s take a look at the main asset types and consider how allocating them properly might look in various scenarios.
Equities (Stocks and Stock Mutual Funds)
The principal dimensions to consider when investing in equities are size (large-capitalization companies vs. smaller companies with less capitalization), value (price per share relative to book value), and profitability (the companies’ ability to consistently generate excess income from operations). By aligning an equity portfolio to overweight stocks with higher expected returns along these three dimensions, an investor can generally expect to receive above-market returns over time.
Fixed Income (Bonds and Other Interest-Bearing Investments)
The principal dimensional characteristics of fixed-income investments are duration (time to maturity), quality (creditworthiness of the issuer), and currency (nation of issue). Here again, when constructing the fixed-income portion of the portfolio, overweighting assets with superior expected returns may enable investors to achieve advantages in portfolio performance over time.
International Assets
Research also demonstrates that in any given year, one market or the other may provide superior returns. Though the United States represents more than half of the global equity market capitalization, there is still a large opportunity beyond the borders of the US. No one can predict which global market will exhibit the best growth in a given year, but investors who incorporate international diversification in their portfolios can often capture superior returns, over time, than those who focus solely on US-based assets.
Real Estate
Though many may not think of it as a financial asset, the value of owned real estate must also be considered when developing a comprehensive financial strategy. Most investors own real estate in the form of their home, and though its main purpose may be to provide shelter, the home also has a real-world financial value that should be considered. Additionally, some investors may hold real estate other than their primary residence, whether commercial or residential in nature. These holdings, while not as liquid as equities, fixed-income, and other types of listed securities, can be a valuable part of the overall financial picture.
Putting It All Together
Naturally, all investors should not hold the same amounts of various asset types. For those interested in long-term growth—a young professional contributing to a tax-advantaged retirement account, for example—a portfolio weighted more heavily toward equities will be more appropriate for their goals and risk tolerance. For others—those in or approaching retirement, perhaps—a higher allocation to the lower volatility of fixed-income assets may be more appropriate. The point is, every investor is unique, each with their own goals, ability to tolerate risk, need for current income, or desire for long-term growth. Additionally, no two investors are likely to have the same availability of resources for investment.
This is why making the right decisions on asset allocation can often be greatly assisted by a professional, fiduciary financial advisor. An advisor can work with the investor to determine the investor’s distinctive characteristics, which can then serve as the basis for constructing a portfolio with assets allocated properly for that particular investor’s needs. This process also includes limiting expenses as much as possible, recognizing tax efficiency, and “coaching” the investor through the inevitable periods of market volatility that occur periodically.
At Mathis Wealth Management, we work with clients to construct portfolios that feature personalized asset allocation. Our goal is to align the client’s holdings with their unique needs, goals, and tolerance for risk, resulting in portfolios that can withstand periods of market uncertainty while delivering expected returns over time.
To learn more about how diversifying your assets can help to balance market volatility, please visit our website to read our article, “Diversification: Your Best Tool for Managing Portfolio Risk.”
Disclosure: Diversification does not guarantee profits or protect against loss in declining markets.
