Investing Basics: Why Asset Allocation & Diversification are Essential to Success
From Simply Smart Insights contributor Zachary D. Rubin, SVP and Client Advisor at Camden National Wealth Management
Whether you’re brand new to investing or you have been cultivating your investment portfolio for decades, Asset Allocation and Diversification are two essential strategies to embrace.
Asset allocation—an investment strategy that dictates the proportion of Stocks, Bonds, and Cash in your portfolio—is the primary factor determining investment portfolio return. Market timing plays only a minor role in return success, and the overall asset allocation of your portfolio is more important than your individual selection of stocks, bonds, and other securities. The most attractive (and risk-adjusted) investment returns are also delivered by key factors: (1) professional, in-depth market research determining how much is invested into various industry sectors (such as technology, consumer packaged goods, etc.), and (2) a carefully balanced portfolio of assets designed to guard against significant losses at any given time in market cycles.
Asset allocation, as you can already see, is not a one-size-fits-all approach. Financial advisors guide investors through risk tolerance, investing timelines, and return goals to customize a portfolio’s asset allocation. For example, a young investor in her mid-twenties with a higher risk tolerance and more time to ride the ups and downs of the market would allocate her portfolio of stocks, bonds, and cash quite differently from an older investor who is nearing retirement. The younger investor’s asset allocation would also likely adjust through time as she ages and changing life events shift her financial needs and goals.
It is critical to consider your asset allocation because different kinds of assets function differently in the market. Over longer investment time horizons, a healthy diversification of assets constructed within a portfolio will protect your investments against expected stock and bond market volatility. Thus, diversification is a key component of your asset allocation strategy.
Curious to learn more? Camden National Wealth Management professionals provide financial advisory services including active asset allocation strategies, retirement solutions, and trust/estate planning guidance. By positioning our clients’ assets appropriately and advising on personalized strategies, we deliver attractive risk-adjusted returns to meet our client’s individual investment goals.