Customising your Asset Allocation Strategy: Factors to Consider

Adopting and maintaining an asset allocation strategy is fundamental to successful investing. It involves strategically spreading your investment portfolio across various asset classes to manage risk. But also achieve a good return for you, considerate of your financial objectives, risk tolerance and investment timeline.

The first important point to understand is that there is no one-size-fits-all approach to asset allocation. You want to tailor your strategy to fit your unique goals and requirements and then manage change ongoing.

As a certified financial planner, with over 20 years of investment experience. I have written this blog to highlight the key things to think about, when creating an asset allocation strategy.

What is an asset allocation strategy and why is it important?

The two key drivers of investment return are asset allocation and investment selection. Asset allocation is often the biggest driver of return and refers to the performance of the overall asset class. Investment selection will determine if your particular investment outperforms or underperforms the average of the asset class.

From year to year, each asset class will perform differently. Some years shares will outperform cash and other years cash will outperform shares for example.

To illustrate this, for the full calendar year in 2022, the best performing asset class was cash, with a return of 1.3% and US Shares for example (S&P 500), were -12.2. In 2021 however, cash rates were 0% and US Shares (S&P 500) were the best performing asset class, with a return of 36.6% (Source return data from Vanguard).

While this is only a limited example it clearly shows the importance of having an asset allocation strategy. Because asset allocation drives return for one thing, and also spreads risk!

Your Financial Goals:

As you map your financial journey, it is always ideal to start with your financial goals. Whether it’s planning for your retirement, your child’s education, property investment, planning for your business or wealth accumulation. Matching your asset allocation to your specific goals ensures your investments are actively drive you towards achieving your financial milestones.

Your Appetite for Risk:

Risk tolerance is your ability to withstand potential losses in your portfolio. It’s a personal assessment that reflects your comfort level with market fluctuations and potential setbacks. Those comfortable with higher risk often allocate more to aggressive, growth-oriented investments like shares and property, aiming for potentially higher returns.

Conversely, individuals with lower risk tolerance tend to favor more conservative assets such as bonds or cash, focusing on stability over aggressive growth. Balancing your risk appetite with diversified asset allocation is key to aligning your investment approach with your comfort level and financial goals.

Time Horizon:

Your financial goals come with their own timelines, and that timing makes a big difference in how you plan your asset allocation. For an example if you don’t need to turn your investments into cash for a while, you can handle more uncertainty in the market. That’s because you’ll likely have more room and time to recover from any unexpected swings in the market. On the flip side, when you are planning for short-term goals like 1- 3 years, such as saving for your child education, payoff your debt or purchasing a vehicle, this can’t afford to take a significant amount of risk, because there won’t be enough time to make up for the losses. Balancing your goals with different timeframes requires careful asset allocation decisions. So, it’s not a straightforward call, but seeking expert financial guidance can help you navigate these complexities and find the best path forward.

Rebalancing:

Asset allocation strategy is not a one-time decision; it’s an ongoing process that requires regular monitoring and rebalancing. Changes in the market and your financial situation might require you to modify your asset allocation strategy to ensure they match your desired risk level and stay aligned with your goals.

Professional Guidance:

Remember, what works for someone else might not work for you, so seeking guidance from a qualified financial advisor at Yield can provide you with valuable insights and personalised recommendations tailored to your unique circumstances.
At Yield, we are here to help you create a personalised asset allocation strategy that supports you to achieve your financial goals with confidence.