How to stabilize returns over long periods of time by spreading out your dollars across investment categories
Every investor has been cautioned at some point not to put all of their money in one category, but rather to spread it out across many categories to create a diverse portfolio.
Those different categories are called asset classes and spreading them out to achieve a stable return is an investment philosophy known as asset allocation. A diverse or balanced portfolio will include asset classes that perform well and others that don’t at a given time, but that performance can flip during different economic conditions.
What Are Asset Classes?
When we talk about asset classes, in a broad sense, we are talking about groups of similar investments, in the form of stocks, bonds, or cash. Stocks can provide the greatest growth opportunities, but also carry more risk. Bonds provide a steady income stream, while cash is there for you to use when you need it.
If you have a more aggressive portfolio — more common for young or beginning investors — you will have more stocks than bonds and cash. A more conservative portfolio would be the opposite. How your portfolio is composed depends largely on your goals and timeframe. Risk and your risk tolerance is also an important factor. Someone nearing retirement has a lower risk tolerance than someone retiring in 30 years, as the latter has time to weather the ups and downs of the market.
Thoughtfully Allocating Your Portfolio
Thoughtfully allocating your portfolio can greatly enhance after-tax returns. Below are three types of accounts to consider for asset allocation:
Roth Account
Allocate higher-growth strategies to Roth retirement accounts (if available).
- Allocate primarily to global equities and other high-growth strategies
- Additional consideration should be given to actively managed, higher-turnover equity strategies
Traditional Retirement Account
Allocate tax-inefficient asset classes to Traditional retirement accounts (Traditional IRA/401/403b).
- Focus on asset classes which produce income taxed as ordinary income
- Tier 1: High Yield Bonds, Dynamic Bonds
- Tier 2: U.S. Core (Taxable) Bonds, REITs
- Tier 3: Global Bonds, TIPS
Taxable Account
Round out the portfolio allocation.
- Determine whether to allocate to tax-exempt (municipal) bonds based on federal tax bracket
- Allocate to global equities which produce income typically taxed at favorable qualified dividend rates
- Additional consideration may be given to lower-turnover strategies
Financial Professionals are Here to Help
At Emerj360, we have helped clients build wealth through historic market fluctuations. We know how to position portfolios to protect assets during hard times and reap the benefits when times are better.
We are selective and strategic in our approach, never making rash decisions based on emotion or what is hot. We help clients build portfolios that match their timeframes, encourage them to stick to their plans, and ultimately help them achieve their goals.
If you’d like to learn more about building an investment portfolio that meets your needs, check out our Investing page, and get in touch. Regardless of where you are in the process, we are ready to help.
