Determining a proper asset allocation is an important first step in creating your portfolio and planning how it will grow in the future. Asset allocation is the process of diversifying your investments into different asset classes based on the investor’s time horizon, their goals and how much risk they can tolerate.

Brian Bushman

“People always ask me what they can invest in that will make them a lot of money without the chance of losing any,” said Brian Bushman, Saxon Financial Advisor. “I tell them that this simply doesn’t exist. But I can, however, help them design an optimized portfolio based on their risk tolerance and what they are trying to accomplish.”

Whether you’re just beginning to save for retirement or you’re much further down the road with more substantial savings, asset allocation is the result of understanding your comfort with risk and how to best diversify your investments to accomplish your goals.

The key to asset allocation is diversification.  This allows an investor to take advantage of investing in many different opportunities which can reduce their overall risk. Assets can be allocated either strategically or tactically. A strategic plan sets a target allocation and consistently rebalances that allocation back to the original percentages while a tactical plan focuses on adjusting the portfolio based on current economic conditions and opportunities in order to produce a better risk adjusted return.  Brian and the investment team at Saxon bring a hybrid approach to designing and managing their investor’s portfolios.

Many investors only consider the returns on their investments, but it is very important to assess the level of risk a portfolio is taking to achieve that return.  Saxon’s approach is to optimize this risk vs. return ratio.

It is also important for investors to understand there are different types of risk.  Most associate risk with investment risk which is the risk of losing money.  However, there are many other risk factors to consider.  Inflationary risk, interest rate risk, credit risk, taxability risk, currency risk and legislative/political risk are other types of risks that need to be considered when developing a portfolio.

Below are the three main factors needed in designing a suitable portfolio for the client.

3 Factors in Designing a Suitable Portfolio

  1. Time Horizon

The amount of time that you have to reach your goals should directly impact the level of risk you are willing to take.  When you’re young you have much more time to recover from any losses that could be incurred from a drop in the market, but as retirement approaches you have less time to recover from market losses.

The closer you get to retirement, the more you should consider reducing your risk level.  Once you retire and need income from your investments you may need to redesign your portfolio from an accumulation portfolio to an income portfolio.

  1. Risk Tolerance

Typically, investments that have the potential to generate higher returns are riskier. This is where the idea of risk tolerance comes in.  This refers to the amount of volatility an investor can tolerate.

If your risk tolerance is low, then you will likely earn a lower return. To compensate for a lower anticipated return, it is important to evaluate the amount you are investing and possibly adjust your timeline accordingly to reach your goals. Usually gauged by a questionnaire, risk tolerance is often used to categorize investors as aggressive, moderate or conservative.

  1. Goals

Each person’s goals are different, whether you are working towards a long-term goal of retirement or a short-term goal, you should consider these goals in your asset allocation plan. One person’s ideal asset mix could be completely wrong for someone else. Outside of setting financial goals and an ideal retirement goal, it is important to set a goal to adjust investments as you age.

“There is no crystal ball that provides insight on how to best allocate assets. It’s a process that begins with an initial risk assessment, diversifying your investments and continually monitoring the progress of your portfolio,” said Brian Bushman, Saxon Financial Advisor.

A Saxon investment advisor can provide guidance through the process of creating a well-balanced portfolio.

To download the full CenterStage article click here.