With the 2003 equity markets having experienced their first positive returns in four years, investors finally have a reason to applaud. But with a new year comes the question of the market's outlook going forward and a reminder to rebalance your portfolio with a suitable asset allocation strategy.
Why Does Asset Allocation Matter?
After an almost 20 percent return on the S&P 500 and a 40 percent surge in the Nasdaq, one can certainly make the case that the easy money has already been made. Simply riding the wave is no longer an option. Rather, it's imperative to protect your portfolio against a possible downturn while positioning your holdings for the best possible returns. Your asset allocation decisions are critical in balancing these two needs. In fact, history has proven that exercising a sound asset allocation strategy has a larger impact on a portfolio's returns than picking individual securities.
How Can I Use Asset Allocation Strategies To My Advantage?
In its simplest form, asset allocation will offer a basic means of balancing and rebalancing your portfolio to suit your individual investment profile and objectives. It can also be used to help implement your particular investment style and aid you in diversifying across various industries or sectors.
Balancing your portfolio to your investor profile. Traditional asset allocation is based on three primary asset classes: stocks, bonds, and cash. This should depend on your outlook, timeframe, and risk tolerance. Conservative investors, whose primary concern is protection of principal, should generally have less exposure to equities and a larger portion of their assets devoted to fixed income. More aggressive investors may wish to be more involved in stocks.
Weighing growth vs. value. When the market is booming, growth stocks usually outperform, but when it's not, value stocks tend to shine. While you can't predict the future, you can allocate your assets with a suitable mix of both growth and value in a way that properly addresses your outlook and needs.
Diversifying exposure across all sectors. The old cliché about never putting all your eggs in one basket rings especially true with stocks; it's become increasingly evident that it's crucial to diversify your holdings throughout the various sectors of the economy. Too much exposure to one area can be risky and can keep you from benefiting from positive performance in other sectors. For example, an investor who had most of his or her money invested in Industrials in 2003 would have faired well through the third quarter, with 17.7 percent return, but would have missed out on participating in the even better 36.5 percent performance of the Technology sector. Many Wall Street strategists now offer recommended weightings on sector allocations in a model portfolio compared to the S&P 500. IBI