There are stories of fortunes won and lost on picking the next great security. The sensationalism surrounding various breakthrough stocks keeps speculators locked on the market, hoping their big bets will be the ones that make their career instead of break it. But these stories mislead investors. Strong investment strategies are not grounded in picking winners but in having a properly diversified portfolio. Asset allocation is the largest determinant of portfolio success.
Asset allocation balances risk and return by creating a portfolio consisting of holdings in all major asset classes: stocks, bonds, and cash/equivalents. Strategic allocation, a type of asset allocation, is used for long-term portfolio growth and centers on three factors: risk tolerance, performance goals, and time horizon. A successfully allocated portfolio is one that invests funds into assets that have a low degree of correlation–that is, you don’t want stocks that perform in lockstep with each other. This lowers volatility, bolstering the long-term success of the portfolio.
Based on investors’ ages, their allocation may differ. A young investor who has a longer time horizon might choose an 80/20 split of their assets into stocks vs. bonds, because they can look past the short-term volatility of the market. Older investors will likely allocate more to bonds, targeting consistency and security in the short to medium term. Investors may depend on fund managers to find funds that suit their tolerance for risk. Active managers rely on stock picking and market tips to bring in returns, whereas passive managers rely on various indexes.
Citing a Morningstar report from October 2021, CNBC noted, “A majority of active managers failed to beat their passive benchmarks in the last year and only 11% of large-cap fund managers outperformed over a 10-year period.” At LCR Wealth we employ top advisors in the industry who use a combination of passive and active strategies, with strategic allocation tailored to each client. We adjust clients’ investments based on long-term changes in their risk tolerance, performance goals, and time horizons while staying true to low-cost, passive-style allocation. We target low volatility and consistent growth based on our clients’ individual profiles, providing them with the knowledge and savvy to meet their goals in bull and bear markets.