How asset allocation works in your portfolio
Asset allocation is an essential tool for building a balanced portfolio. Each of the major asset classes has a role to play in your investment plan. The cash portion provides security and liquidity, fixed income adds stability and regular income, while equities provide the growth potential you need to reach your goals and stay ahead of inflation.
Disciplined investing
The asset mix that’s right for you will depend on your objectives, risk tolerance, and time horizon. Having the right allocation makes it easier to stay the course through challenging markets — a cornerstone of disciplined investing.
In volatile markets, having an asset allocation strategy takes on added importance, as it provides a framework to manage your portfolio through changing conditions.
For instance, when the markets are strong, the equity component of your portfolio may rise above your target weightings. In this case, following your asset allocation plan could mean selling some of your equities and reinvesting the profits in cash or fixed income. Doing so would reduce your risk and restore your portfolio’s balance.
Conversely, market corrections can reduce the value of your equity holdings, bringing them below their intended weighting. In that case, it may be prudent to sell some bonds or other fixed-income holdings, which may have appreciated, and reinvest in equities. This can present an opportunity to add shares of quality companies at lower prices, creating the potential for future gains.
Revisit your plan
Market downturns also present an opportunity to revisit your investment plan and make sure your asset allocation is still in line with your risk profile.
You may find that your risk tolerance is now lower than when you established your original allocations. As well, if you haven’t adjusted your investment plan for some time, it may be time to adopt a more conservative asset allocation that reflects your age.
Here are some principles to keep in mind as you review your asset allocation and determine whether your holdings need to be rebalanced.
Employ your cash. The cash portion of your portfolio becomes even more strategic in uncertain markets. It can provide security in case you need money quickly, and act as an investment fund to take advantage of new opportunities.
Average your costs. Investing on a regular basis can potentially help you smooth out the average price you pay for an investment. Dollar-cost averaging can be especially beneficial in changing markets, as it may reduce your average price.
Look for value. Volatile markets can create opportunities for investors with a medium- to longer-term horizon. We can help you to identify sound, market-leading companies which trade at attractive prices and which fit your risk profile.
Keep an eye on bonds. An appropriate fixed-income allocation, in line with your objectives, can provide welcome stability and income when equity markets are unpredictable.
Think long term. It’s important to have a portfolio that can outperform over the long term, through varying market conditions. While you may adjust your holdings, it’s a good idea to maintain a focus on solid companies with strong balance sheets and a record of paying dividends. Remember that dividends may represent asignificant part of your long-term returns.
Getting going
Now is a good time to review your asset allocation. Speak to us about how to prepare your portfolio for all market climates.