Strategic Asset Allocation: How A Financial Advisor Can Help
by Gabriel Lewit
Are you aware of where all of your money is invested? With so much information available about investing, you may wonder if you need to hire a financial advisor. The short answer: it depends on your willingness and ability to manage your investments yourself.
Asset allocation is a critical investment strategy that can be particularly confusing for novice investors. Not only does it require knowledge of various investment options, but also a detailed understanding of which investments are best suited for you. If you don’t feel comfortable researching and implementing a strategic asset allocation plan, it may make sense to work with an advisor who can help you develop and implement this strategy, as well as other aspects of financial planning.
Explore the concept of asset allocation, how to approach it, and why it’s easier with a CERTIFIED FINANCIAL PLANNER™ on your side.
This article answers asset allocation questions including:
- What is asset allocation and why is it a crucial strategy?
- Why are risk tolerance and time horizon important for investors?
- How to diversify your portfolio and why you may need assistance
- When to hire a financial advisor to help with your financial planning
- What should you consider when establishing a financial timeline?
Ready to expand your knowledge of retirement planning, tax strategies, and investing? Feel free to peruse the SGL Financial resources page which features more than 15 ebooks, toolkits, and other FREE educational tools.
What to consider in the asset allocation process
The process of dividing your money is known as asset allocation. This is a long-term strategy that works by diversifying your portfolio, thereby reducing risk and maximizing gains.
Two of the main decisions involved in asset allocation are what category of investments to make and how much of each to invest in. These decisions will depend on many factors including your risk tolerance and time horizon.
What is your tolerance for risk?
The higher the risk you’re willing to tolerate, the more leverage you can get out of investing in stocks or bonds—which means greater potential returns but also higher volatility and risk of loss if things go wrong.
In addition to your current financial circumstances, it’s also worth considering the state of the economy when determining risk tolerance. For example, we’re currently experiencing inflation of over 8%, so that fact may influence your risk tolerance.
Understanding time horizon
The core of investing is to put our money into purchasing an asset, and leave it there until you sell the asset, hopefully at a higher value. Your time horizon is the timeframe in which you’ll need to use the money you’re investing.
For most investors, retirement is the most common time horizon. You may have other financial goals, such as saving for your children’s college education, and those will factor into your overall time horizon.
Establishing your goals and timeline
Before you can develop a financial plan, you need to understand your goals and timeline. You also need to understand your risk tolerance, which is how comfortable you are with taking on additional risk in exchange for greater potential returns.
Identify your investment goals
If the goal of your investment portfolio is simply to produce income for retirement, then there’s likely less emphasis on maximizing returns. If it’s important for you to achieve high returns but also want some protection from market downturns, then this could be another factor influencing your asset allocation strategy.
While retirement is arguably the most common investment goal, there are plenty of others. Here are more of the common financial goals that are important to American investors:
- Saving for children’s private schooling or college education
- Investing for capital to start a business
- Saving for a big wedding
- Saving for the down payment on a new home
- Keeping your timeline loose so you have money for emergencies
There’s no wrong answer when it comes to your investment goals, but it is important to figure out what they are. Some investors will have a variety of short, mid, and long term goals that comprise their investment timeline.
The value of knowing your financial timeline
Once you’ve established what your investment goals are, then you can figure out how much time you have to accomplish them. This knowledge will help you determine your risk tolerance as well.
For example, if you need to make investments that will equal a million dollars, you’ll have a higher risk tolerance if your goal is ten years away as opposed to 30 years. Ultimately, establishing your goals and timeline allows you to make smarter investments that closely fit your specific lifestyle.
Understanding your risk tolerance
To determine your risk tolerance, you must first define what it means to be comfortable with risk. The answer to this question will vary from person to person, as each individual has their own level of comfort with taking on more or less financial risk.
It’s important for you to understand that the level of risk in your portfolio is determined by how much volatility there is in the market at any given time.
- A low-risk portfolio refers to one with very little market fluctuation.
- High-risk portfolios are those that experience frequent changes in prices and performance levels.
As every investor’s risk tolerance varies, so does their ability and desire to take on higher amounts of volatility. Risk tolerance can also change over time – meaning that investors may need a higher or lower allocation depending on life stage changes.
How life stages can vastly impact risk tolerance
To illustrate how life events can affect your risk tolerance, consider how someone may invest when they’re single, successful, and in their mid-20’s. Now throw in the impact of a marriage, kids, planning to buy a home, or eventual divorce, and it’s easy to see how goals can change.
Developing an asset allocation strategy
An asset allocation strategy is a plan that dictates how much of your investment portfolio should be placed in stocks, bonds and other types of investments. An ideal strategy will help you balance risk against reward by diversifying among different classes of assets.
How can you develop an appropriate asset allocation strategy?
If you plan on allocating your portfolio by yourself, then establishing your goals, risk tolerance, and timeline is your first step.
Next, assess the various investment options available, how they’re performing and whether they’re good investments for the current economic climate.
Now that you’re aware of potential investments, it’s time to invest in a balanced manner, ensuring that your portfolio is divided among a variety of stocks, bonds, metals, real estate, and other investments.
Note that the time and effort involved in doing this process properly are significant. Even the most motivated, knowledgeable investors can get overwhelmed when managing multiple accounts and tracking their portfolio over time.
Re-balancing and re-evaluating
Rebalancing and re-evaluating are necessary when it comes to allocating your assets. Rebalancing is the process of bringing your portfolio back to your target asset allocation.
Re-evaluating involves reviewing the performance of each individual holding to make sure that it still aligns with your goals. For example, if your stock choices have gone down significantly, it may be worth reassessing that part of your portfolio.
When you don’t rebalance or re-evaluate, it’s easy for one aspect of your portfolio to be overemphasized and put you at risk for unwanted volatility.
A financial advisor can help you achieve your financial goals
There’s no doubt that strategic asset allocation can quickly become a complex, time-consuming process, especially if you’re doing research on each investment. Unless this is a process you enjoy, you’re very likely going to want the help of an expert.
A CFP® can help you achieve your financial goals by providing the expertise and guidance you need to make better decisions. For instance, a financial advisor might be able to show you how investing in a particular fund will help you reach your long-term savings goals faster than if you had invested in individual stocks on your own.
Do you know why and when to hire a financial advisor?
Essentially, as soon as you feel overwhelmed or confused is a good time to hire an advisor. For many investors, they care deeply about making the right financial moves, so they’ll hire a professional from the start. A good financial advisor will help prevent common mistakes many investors make without realizing it.
Once you’ve committed to an investment plan, going back to square one may not be possible, so having a professional on your team can be extremely helpful. For example, an advisor may advise against borrowing money from your mutual funds and instead suggest that you take out a personal loan. Or an advisor may recommend using cash from another account instead of tapping into existing funds for short-term needs like paying off debt or making repairs around the house.
Save time for the things you love
In addition to offering this type of guidance, knowledgeable advisors can save clients time by working with them directly rather than having them spend hours reading through technical documents themselves. Ultimately, something as important as your portfolio deserves a second look from an expert. Why deal with the stress of going through the investment process alone when professionals are readily available?
Take the stress out of investing with SGL Financial
Certified experts like our team at SGL Financial have a deep understanding of the investment opportunities available to you. From laws and taxes to how certain stock sectors perform under high inflation, our team of experts will guide you through it. When you’re planning for retirement and allocating your assets, you want it done right.
With our financial advisors in Buffalo Grove, IL on your team, you’ll have peace of mind that your money is working in your favor.
SGL Financial is a fiduciary, holistic, and fee transparent firm that can help you with all of your investment needs. Feel free to connect with us via phone, email, or by filing out our contact form at your convenience. We look forward to working with you.
Whether you need advice on decreasing taxes, planning for retirement, or allocating your assets, our team of experts at SGL Financial can work for you. Send us a quick message to set up an appointment or read through our website to learn more!
