We are firm believers that asset allocation, or the lack thereof, is the driving force behind the success or failure of a portfolio. Using asset allocation as a fundamental approach to building portfolios will significantly reduce the overall risk in a portfolio without sacrificing total return. While an asset allocation strategy is no guarantee for future success, it will greatly reduce the risk associated with not having a well-diversified portfolio.
At Lane Bridgers Schill, using asset allocation models to build and manage client portfolios, we offer both actively and passively managed portfolios at the client’s discretion. The actively managed portfolios will include mutual funds or separate account managers, while the passively managed approach will use index funds and exchange traded funds (ETFs) as the primary components of the portfolio. It is your choice, we simply help you to understand the difference and make an informed decision.
The Case for Asset Allocation
With decades of market activity to analyze and hundreds of
studies to review, we now know the most important factor that
affects investment performance isn’t the ability to
time the market, anticipate global economic changes, or forecast
investor psychology. In fact, more than 90% of a portfolio’s
performance depends on a process known as asset allocation—the
science of combining the right categories of investments.
The concept was originally developed by
Nobel laureate Professor Harry Markowitz of the University
of Chicago. Large pension-fund managers and other institutional
investors have benefited from this approach for years. Now
individual investors are taking advantage of this methodology
as well.
What Drives a Portfolio?
- 4.6% Security Selection
- 2.1% Market Timing
- 1.8% Other Factors
- 91.5% Asset Allocation
Source: Brinson, Singer, and Beebower, "Determinants
of Portfolio Performance II: An Update," Financial Analyst
Journal, May-June 1991.
Diversification Is the
Key
Strategic asset allocation begins with diversification—making
sure you don’t put all your money into one type of investment.
Regardless of the percentages, a strategically diversified
portfolio often includes a mix of:
- equity investments including domestic and
international stocks and stock mutual funds;
- fixed-income securities such as corporate,
government, or municipal bonds; and
- other investments including CDs and money
markets.
These categories of investments are also known
as asset classes.
Investments Working Together
Different asset classes react differently to the same changes
in the world’s economy. The right mix is critical because
it doesn’t matter as much how one particular investment
performs, but how all of your investments perform together.
Diversifying your investments may reduce your
portfolio’s volatility. Of course, no strategy can guarantee
against losses in every conceivable investment situation.
When you take a strategic approach to investing,
by diversifying your portfolio and taking advantage of asset
allocation, you arm yourself with the tools of successful
investors.
In Summary
When you work with a Lane Bridgers Schill Financial
Advisor, your advisor will help you determine if your portfolio is properly diversified by carefully walking you through the following steps:
- Analyze Existing Portfolios
- Assess Overall Investment Objectives
- Develop Asset Allocation Model
- Select Appropriate Investments
- Monitor Performance
- Annual Client Review
If you are interested in learning if your current portfolio, including your 401(k) plan, is well-diversified to minimize risk and properly allocated to help you meet your long-term planning objectives, please contact a Lane Bridgers Schill Financial Advisor for a free comprehensive portfolio analysis.
