Allocations Aweigh

What’s the right asset allocation?

Public Domain. Source: Wikipedia

In simple terms, asset allocation is the process of deciding where to invest your money. Not who to have manage it – like Vanguard or an advisor – but what to have your money invested in: stocks, bonds, real estate, bank deposits, commodities. Your asset depends on a couple of basic questions: what do you need the money for, when will you need it, what other resources you have, and other specific issues, like your tax situation, your access to the funds, and so on.

Also, it matters where things stand in the market right now. Stocks have been on a run, but not all stocks. The FANG stocks – Facebook, Amazon, Netflix, and Google – are up 35% so far this year, far outpacing the averages. It’s hard to see what might get in their way. But what goes around comes around. In the late ‘90s the “Four Horsemen of the Internet” – Cisco, Sun, Oracle, and EMC – were all the rage. And then the worm turned, and only one of those stocks ever got back to its record high.

Asset allocation seeks to smooth out these booms and busts by putting some money in US stocks, some in foreign stocks, some in bonds, and some in cash. The challenge comes from the fact that stocks contribute most of the return to a portfolio, but also contribute most the risk. A 50/50 stock/bond portfolio will still be mostly correlated with stock market returns. It just won’t have as much risk. The bond allocation will act like a sea-anchor to the portfolio: slowing it down when times are good, and holding it up when the market contracts. It may be galling to see stocks rise in the double-digits while bonds seem to go nowhere, but those bonds felt pretty good during the Financial Crisis.

Source: ReSolve Asset Management

The right asset allocation is what’s right for you: your circumstances, your preferences, your opportunities. Don’t get sucked into the latest hot trend. We don’t know the future. Chances are, today’s darling could be tomorrow’s dog.

Douglas R. Tengdin, CFA

By |2017-09-27T07:10:24+00:00September 27th, 2017|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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