The Basics of Asset Allocation

A few classic portfolio arrangements are common for those seeking balance, income, or growth.

Successful asset allocation goes hand in hand with investment’s golden rule, diversification. Achieving optimal allocation is a key investor goal, but what constitutes “optimal” is a diverse variable not only between individuals but often for the same individual over time.

Generally speaking, allocation hinges on balancing different asset classes like stocks, bonds, and cash. Doing so makes a portfolio more robust in the face of market ups and downs—even if one category crashes, it’s unlikely that all three will at the same time. This minimizes risk while potentially upping gains. Allocation is a well-established practice that has given rise to a few basic models that investors often use, depending on their goals.

Which model currently fits relies, in large part, on your risk profile and investment horizon (the time by which you want to meet an investment goal). Both factors are best ascertained with the guidance of an experienced wealth advisor before structuring allocation, so let’s review a few models and the investor types they commonly suit.

Some textbook allocation arrangements

Picture three investors, each respectively seeking growth, income, and balance from their portfolios. Growth-oriented individuals tend to have the longest investment horizon of the three, making them more tolerant to risk. The result of this may be an allocation model heavily, if not wholly, favoring stocks.

Stocks have the reputation of being riskier than bonds for legitimate reasons. Bonds are less sensitive to market shifts and come with the promise of a return on face value when they reach maturity. Stocks, though more volatile, have the potential for far higher returns. Thus, those with longer horizons favor them; investors weather market storms over time in hopes of significant gains because short-term profits aren’t required.

Income-oriented allocation models are typically more bond-heavy. Stocks—especially individual securities—are the minority of these portfolios because this type of investor favors dependable cash payouts. Cash and cash equivalents like treasury bills, market deposit accounts, or certificates of deposit may factor highly into this investor’s allocation model due to their extremely low risk of loss.

Where bonds and stocks are present, high-quality bonds and dividend-paying stocks may combine to provide a reliable stream of passive income with less risk. Returns may not be huge—but for these investors, consistency rules. Horizons are also usually shorter for this model, which is best suited for short- to mid-range investing.

The balanced allocation model may well have a 50/50 split of stocks and bonds or a stock/bond preference in the region of 10% over the other. This investor is more risk-averse than their growth counterpart but more risk-tolerant than an income-oriented one. Balanced funds offer the potential for both income and growth and may perform efficiently across all time horizons.

Other asset allocation models

Listing only stocks, bonds, and cash is painting an incomplete picture of investment allocation. Real estate, various alternative investments, or commodities can also be in the mix and have their own short and long-term investment concerns. Stocks and bonds also have subclasses that require more in-depth consideration along risk and horizon lines.

Just as there are more portfolio options, there are many more allocation models beyond growth, balance, and income. Tactical asset allocation, for example, is a dynamic form of investment management that involves a particularly hands-on approach. The process involves spotting any short-term opportunities for wealth generation as they arise, making some portfolio course adjustments to capitalize, and then returning to the previously planned direction. That said, a strategic allocation (covered below) is usually preferable, as managers typically underperform the long view when making short-term decisions about allocation.

Strategic asset allocation is longer-term and aims to keep a portfolio’s class distribution even through periodic rebalancing. For a simple example, an investor may have a 40/40/20 allocation percentage split between stocks, bonds, and cash. Should bonds outperform stocks in a year, some strategic rebalancing may occur to restore equilibrium.

Beyond these examples are numerous proprietary models highly customized to the goals and circumstances of an individual investor.

Allocation boils down to 2 essential services

Ultimately, your wealth management advisor should take a two-fold approach to any configuration by respecting risk tolerance and horizon while offering downside protection.

Your wealth advisor is also the perfect sounding board for periodic portfolio reviews because horizons, preferences, and needs change—in either a tactical or personal sense. Professional experience and foresight can be invaluable in preventing loss and nurturing potential gains, particularly when it comes to the added complication of navigating the tax implications of a chosen allocation model.

Lindberg & Ripple can provide you with the right expertise and advice that are solely for your benefit. As independent advisors, the only thing we answer to is our clients’ best interests.

Lindberg & Ripple offer customized wealth management, investment, and insurance solutions to wealthy families and successful businesses. We help our clients craft a comprehensive wealth planning model to achieve their financial goals with minimum fuss and maximum savings. Connect with us to learn more.


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