Over the past decade investors who developed and maintained asset allocation and diversification strategies enjoyed much greater success than those who were significantly overweight; for example: technology (2000-2002) or financials and real estate (2007-2010).
Consider the following:
On a particular island…
The entire economy consists of two companies: one that sells umbrellas and another that sells sunscreen. If a portfolio is completely invested in the company that sells umbrellas, it will have strong performance when it rains, but poor performance when the weather is sunny. The reverse occurs if the portfolio is only invested in the sunscreen company- the alternative investment; the portfolio will be high performance when the sun is out, but will tank when clouds roll in.
To minimize the weather-dependent risk in the example portfolio, the investment should be split between the companies. With this diversified portfolio, returns are decent no matter the weather, rather than alternating between excellent and terrible.
What happens if a hurricane destroys the island?
One way we help protect you from market ups and downs is to develop an asset allocation strategy. Asset allocation is the process of spreading your investments among different asset classes: International and Domestic stocks, bonds, alternative investments, and short-term investments such as cash.
In the example above it would have been wise to not just invest in businesses on one island but to invest across a couple islands providing not just protection against a collapse of the umbrella and sunscreen markets but also against a broad destruction of the island during hurricane season.
If the island is wiped out, the investments on the mainland or other islands could buoy the portfolio while the destroyed island is rebuilt.
In addition to mitigating risk, an appropriate asset allocation strategy will reduce the likelihood of investors trying to time their buys and sells according to the ups and downs of the market. This means that they will be less likely to buy high and sell low.
Asset allocation strategies are established to meet the individual needs of each investor based on their time horizon (the amount of time their dollars will be invested), risk tolerance, and retirement income goals.
At Harding Financial Group our underlying philosophy is – there is no ‘one size fits all’ when it comes to asset allocation and diversification strategies…our customized approach addresses your unique dynamics, goals and risk tolerance.