Personal Finance

Building a Personalized Asset Allocation

At the core of every financial plan is the asset allocation, which, at the highest level, is the optimal mix of asset classes most likely to achieve your long-term investment goals.
At the core of every financial plan is the asset allocation, which, at the highest level, is the optimal mix of asset classes most likely to achieve your long-term investment goals. A well-defined asset allocation essentially sets the framework and guides the path your investment portfolio should follow to achieve those goals. The most impactful decision for investors when building their asset allocation with their financial advisor is how much to invest in stocks versus how much to invest in bonds. Taking the process a step further, one can decide how much to invest in U.S. stocks versus how much to invest in international stocks, or whether they would like to overweight or underweight certain sectors of the stock market, such as health care or energy. Another consideration is whether it makes sense to incorporate additional asset classes like real estate, commodities, or alternative investments. Every asset allocation is unique and entirely depends on each investor’s goals, needs, and personal preferences. No matter what this optimal mix may look like for you, it is essential to have a well-defined target asset allocation as part of your financial plan.

The Importance of Diversification
One of the core tenets of any asset allocation is diversification. In short, diversification is a way of spreading out your investments and making sure that you are not overexposed to any one asset class or area of the market. Most asset classes do not move in lock-step with one another, so by investing in a diversified mix, investors are able to build a more resilient, all-weather portfolio. Diversification also helps build in a layer of portfolio insurance in instances where specific securities do not perform in the way anticipated, which frequently happens to even the most skilled investors. For example, an investor might have done extensive research and concluded that technology stocks were the most attractive investment for them with the highest potential returns. The investor’s thinking may have been sound, but what if they overlooked something in their analysis or an unforeseen event out of their control comes along that completely changes the outlook for the technology sector? Diversification helps you mitigate these risks and build a portfolio capable of performing adequately in a variety of different scenarios.

Stay Disciplined
Working with your financial advisor to tailor a well-defined asset allocation is only part of the battle. The ongoing monitoring and maintenance of your portfolio is equally important to the initial construction and is key to achieving long-term success. One of the most understated but crucial parts of this is investors’ willingness to diligently stick to their financial plan and asset allocation, while remaining committed to it throughout the market cycle. This means staying disciplined during both good and bad periods, when it can often be most difficult. For example, following a prolonged downturn in the equity market, shifting more money to safe-haven bonds in response to the market turbulence may help you sleep easier at night, but by doing so, you may risk missing out on the subsequent rebound when the market does turn, which can set you back years and reduce the likelihood of achieving your goals. Alternately, following a sustained equity bull market, investors may be inclined to shift more of their assets to stocks in order partake in more of the market’s upside. By doing so, they leave themselves more exposed on the downside when the market does turn, which again, can meaningfully set them back in achieving their goals.

Revisit Periodically
The other part of this ongoing maintenance involves periodically revisiting your asset allocation with your financial advisor to reassess whether it is still appropriate for you. Have your investment goals, needs, and preferences recently changed to the extent that your asset allocation should be adjusted? Or have there been any new developments that changed the outlooks for the asset classes you’re currently invested in? Another important part of this stage in the process is the exercise of rebalancing your portfolio, which means bringing your asset allocation back to the target weightings. Market movements can cause your asset allocation to drift over time and what was once a 60% stock/40% bond portfolio, for example, can turn into an 80% stock/20% bond portfolio following a strong run for stocks. This is why periodically rebalancing your portfolio is essential to making sure that it is still aligned with your long-term goals. Contact us today to discuss whether rebalancing or realigning your asset allocation may be appropriate for your investment strategy and goals.

This does not constitute tax, legal, or accounting advice. For tax, legal, or accounting advice, please contact the appropriate professional.

This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within.

Ryan Shugrue, CFA
Director of Wealth Management Research

Ryan Shugrue is Director of Wealth Management Research for Janney Montgomery Scott, a regional brokerage firm based out of Philadelphia, PA with more than 800 Financial Advisors located across 110 offices. In his current role, Ryan is responsible for leading a team tasked with building a high conviction offering of investment products to be used by the firm’s client base. This includes the curation of recommended menus of mutual funds, ETFs, separately managed accounts, and alternative investments designed to help clients achieve their long-term investment goals.

Ryan is a Chartered Financial Analyst Charterholder, a member of the CFA Society of Philadelphia, and holds FINRA Series 7 and 66 licenses. He graduated with a Bachelor’s degree in International Studies from the University of Richmond.

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