Is Your Asset Allocation Still in Line with Your Investment Objectives?

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In a recent blog, we explained why now is a good time to focus on making some year-end tax moves that could save you money when you file your tax return this spring. This is also a good time to reexamine the allocation of assets in your investment portfolio.

Asset allocation refers to how your portfolio funds are spread out among the primary asset classes of equities (or stocks), fixed-income instruments (or bonds) and cash equivalents, such as money market accounts and certificates of deposit (CDs). It goes hand in hand with portfolio diversification, which is the practice of deliberately choosing a range of investments across these asset classes in order to reduce volatility and smooth out investment returns over time.

Factors in Determining Your Asset Allocation

The right asset allocation will be different for every individual because everyone has a different time horizon, risk tolerance and investing goals. For example, if you are relatively young, such as in your 20s or 30s, and are investing for retirement, you probably have a long-term investing time horizon. Therefore, you might decide on a more aggressive asset allocation that’s heavy on stocks and light on bonds and cash equivalents.

On the other hand, if you are older, such as in your 50s or 60s, and nearing retirement, you have a shorter-term investing time horizon. There’s less time for you to recoup portfolio losses before you need to access your money, so you might decide on a less aggressive asset allocation that’s heavy on bonds and cash equivalents and light on stocks.

Risk tolerance is also a big factor in deciding on the proper asset allocation. As we discussed in a recent blog, the stock market has experienced extreme volatility over the past few months. If daily swings of 300 to 400 points or more in the Dow Jones Industrial Average make you nervous and cause you to lose sleep at night, then you might be better off choosing a less aggressive asset allocation mix.

Don’t “Set It and Forget It”

It’s important to realize that asset allocation isn’t something you can “set and forget.” Over time, the asset allocation in a portfolio will shift due to market movements.

For example, let’s say that back during the summer, you set your asset allocation at 70% stocks, 20% bonds and 10% cash equivalents. However, the stock markets has taken a hit over the past few months and is now nearing correction territory. If the value of your stock holdings in your portfolio has fallen during this time, then your 70-20-10 asset allocation mix has probably been knocked out of whack.

The end of the year is a good time to sit down with your financial advisor and check to see if your asset allocation has changed due to market movements like this. If it has, you may decide to sell securities in one asset class and purchase securities in other asset classes to bring your allocation back in line with your long-term investing objectives.

Keep in mind that doing so might involve selling some securities at a loss in order to buy securities in another asset class. However, doing so could allow you to take advantage of a strategy known as “tax loss harvesting.” Here, you can use the losses incurred when selling securities that have decreased in value to offset gains you’ve realized in other investments and ordinary income.

Maximizing Risk-Adjusted Return

Another important thing to realize about asset allocation is that it’s not intended to maximize your overall portfolio return. Rather, it is intended to reduce volatility and maximize your risk-adjusted return. In other words, asset allocation helps ensure that you have the right mix of stocks, bonds and cash equivalents to provide the optimal rate of return based on the level of risk you’re willing to assume.

Please contact us if you have more questions or would like to sit down together to examine your current asset allocation mix.


The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC's ("Frontier") investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.

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