Welcome to the Weekly SUMmary - 08/27/2021
Asset Allocation and Diversification. WHAT?!?
These finance people always use industry jargon. What’s it supposed to mean for me?
Let’s start with the definitions:
“Asset Allocation 101
Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.”1
Diversification is a strategy that can be neatly summed up by the timeless adage "Don't put all your eggs in one basket." The strategy involves spreading your money among various investments in the hope that if one investment loses money, the other investments will more than make up for those losses.”1
If you have some time and are interested in digesting much more information, I strongly recommend visiting the referenced link below.
Why would we talk about this now, you ask?
Have you ever seen an asset class performance chart? It sort of looks like a periodic table (see example below). Over time, different investments perform better and worse than other investments based on a myriad of factors. One year Large Cap Growth may perform better (i.e. 2019) and other years, Large Cap Value may perform better (i.e. 2020). Historically speaking, rotations have happened amongst all asset classes, including commodities (i.e. 2021) and international (i.e. sometime pre-2010).
Typically, the purpose of Asset Allocation is to Diversify a portfolio so that the investor has holdings in a variety of asset classes. Historically this has led to a more even return. For example, if Large Cap Growth is up one year while Value is down, an even holding in each would put the investor’s return smack in the middle. When the rotation happens and Value outperforms Growth, the investor’s return should again be in the middle, therefore typically never fluctuating as dramatically as any one asset class.
One potential benefit to these strategies is that if the investor is sticking to the old adage “buy low, sell high,” if Growth is up one year and Value is down, one may take the earnings off of Growth to invest in Value; therefore selling high and buying low. Of course, “buy low, sell high” does not work out as one may expect every time. Let’s take a look at International. Prior to 2010, International had fared relatively well in comparison to Domestic investments. One may have assumed that a rotation would put International back in favor in a shorter time frame. However, in August 2021 (other than very small periods of time) the rotation between International and Domestic still has not occurred. This is when diversification may help.
Investing can be hard. If you’d like to learn more or discuss, feel free to book an appointment at the bottom right of this page.
In the meantime...
Do SUMthing smart with your money.
The content provided is meant to be educational in nature only and not to be construed as investment advice. Investments referenced are for example only and should be considered strongly prior to selecting for your portfolio. Investors should research or seek professional advice prior to buying and selling securities.
Investors should consider the investment objectives, risks, charges, and expenses associated with all products before investing; specific plan information is available in each issuer's official statement, which can be obtained from your financial professional. Be sure to read carefully before investing.
Asset Allocation does not ensure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing includes risks, including fluctuating prices and loss of principal.