5 Reasons You Need to Know Your Asset AllocationSubmitted by AssetGrade, LLC. on January 25th, 2014
submitted by Patrick Cote on January 25th, 2014
Do you know what % of your portfolio is in stocks? If you have taken a few minutes to get your AssetGrade score, then you might have struggled with it. In fact, the #1 request from people who have gotten their score is to help make it easier to calculate stocks/bonds/cash (the next revision will do so).
Asset allocation is the % of your portfolio that goes into US stocks, US bonds, international stocks, etc. Here is why you need to know your own:
- Asset allocation is the biggest driver of portfolio returns (and risk). There is some debate within the investment community about exactly how much it drives (some say up to 90%), but most investment professionals recognize asset allocation is the biggest driver.
- The most sophisticated investors, such as institutional and ultra high net worth, generally focus their energy on asset allocation, not chasing hot stocks like Google. At the Asset Allocation Workshop put on by the Boston Security Analysts Society last week, a number of industry leaders amongst institutional investors confirmed the critical role that asset allocation plays for them.
- All financial plans include asset allocation planning. Sometimes, it is implicit, such as when you keep your holdings in cash for an upcoming expense. The good financial plans are explicit about it, such as the rule of thumb of keeping 100 less your age in stocks. How else can you plan for any major use of your money?
- Rebalancing your portfolio requires knowing your asset allocation. Wouldn’t you rather buy low and sell high? Rebalancing regularly forces us all to do so and lets us take advantage of big moves like the drop in stocks over the last couple of weeks.
- Focusing on asset allocation instead of stock-picking will save you a lot of time and energy. It might require some effort to figure out your asset allocation the first time, but it should not change that often so it won’t require much effort to keep up with it. Contact us at AssetGrade if you would like us to help.