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What you need to know about asset allocation

One of the most important decisions you can make when it comes to your investment portfolio — and one you’re sure to revisit often — is your asset allocation strategy. This involves the strategic placement of your investments in different asset classes such as stocks, bonds, real estate, and cash. Within the stock and bond asset classes there are also regions, styles, or sectors to allocate to.

How to determine the right strategy for you

1. What are your financial goals? Are you looking to generate secure income? Save for retirement? Working toward a down payment? This will help determine your asset allocation. Life changes matter too: have you changed careers or added a family member?

2. What is your timeframe? The return you expect and the timeframe in which you intend to use the funds will determine both how conservative and liquid your strategy should be. Have timelines changed?

3. How risk averse are you? Asset allocation is driven by your objective risk capacity covered in part by the first two points, but also by your unique personal risk tolerance. People have different characters and personalities, so it’s important to match up your portfolio to yours.

Types of asset allocation decisions

Strategic: Every investor needs a long-term strategic allocation and a plan to keep on it. Different asset classes rise and fall, so periodic rebalancing keeps your portfolio on track for the right amount of risk and can even capture some relative value by trimming the best performing asset classes and topping up the relative laggards.  

Tactical: The tactical approach additionally allows for more proactive adjustments to the asset mix. Active tactical positioning requires macroeconomic knowledge, effort, and a repeatable process to make decisions based on news, data, and insight.

No matter which asset allocation strategy you decide on, you’re bound to be successful if you review your portfolio regularly and keep an open dialogue with your portfolio manager.

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