The erratic fluctuations in the financial markets during the past several quarters have many people questioning if a change in their investment strategy is needed. At Perspective Financial, we apply time-tested asset allocation and diversification principles to balance portfolio risk and return. While fine-tuning and adjustments are sometimes necessary to account for current events, the fundamental principles of asset allocation and diversification remain the best ways to manage risk.
“Since the 2008 financial crisis, there’s been a much higher correlation between asset classes,” wrote Carrie Schwab-Pomerantz, CFP® in a recent issue of Schwab’s Investor Insights. “Anticipated returns from stocks and bonds are both lower. Globalization has meant that markets are more susceptible to external shocks — not only financial but also political and environmental. And investors are more wary.”
Acquiring the appropriate mix of asset classes in your portfolio begins with understanding your feelings about risk and knowing how long you plan to keep your money in the market. An investor with a long time horizon and a high risk tolerance, for example, might have as much as 90 percent of a portfolio in stocks with 10 percent in cash; a conservative investor might hold 20 percent stocks and 80 percent bonds and cash; and a moderate investor would fall somewhere in-between.
Within these broad investment categories, non-traditional asset classes – such as real estate investment trusts (REITs), commodities (energy, agriculture, precious metals) and international bonds – can provide further diversification and potentially lower investment risk.
“An appropriate asset allocation and a long-term view are still fundamental to mitigating risk and protecting your portfolio, but that doesn’t mean you should invest and forget,” says Schwab-Pomerantz. “At the very least, you should be reviewing your portfolio quarterly and rebalancing yearly to stay within your target asset allocation.”
At Perspective Financial, we review client portfolios monthly, and rebalance as often as necessary.