5 Variables to Consider in Asset Management

One of the crucial components for long-term investing is broadly deciding how you’re going to divvy up your investments. We’re talking about broad asset categories like stocks, bonds and cash.

Coming up with an asset allocation strategy (how much money you put in stocks, bonds and cash) can depend on identifying several variables: your appetite for risk, your time horizon, your financial goals and your life goals. Those variables are outlined below.

In addition, “Most investors may need several allocation strategies to align with their various investing goals as they reach different stages in life,” said Joe Correnti, senior vice president of brokerage product at Scottrade.

Asset Allocation Variables

  • Assets classes. We’ll keep things simple by identifying three broad asset categories: equities, which mostly includes stocks; fixed income, which mostly includes bonds; and cash. You can hold most assets individually, or in mutual funds and exchange-traded funds.
  • Risk. The concept of risk is based on Modern Portfolio Theory which says that risk and returns are correlated. In general, the greater the risk, the greater the long-term return. However, the greater the risk, the greater the potential for large short-term losses. Risk also can be viewed as volatility. Investors should consider their appetite for their portfolio going up and down in short periods of time.
  • Financial goals. Most people have multiple purposes for saving and investing. They can include short-term purposes like a vacation; mid-term, like college education; or long-term, such as retirement.
  • Time horizon. In theory, the longer your time horizon, the more risk you can take because you’ll have more time to recover from intermittent bear markets. As you get closer to the time you need your funds, you might consider reducing your risk to offset the short-term swings in the value of your portfolio.
  • Life goals. Your life can change unexpectedly, and it can impact your financial goals. You should be ready to alter your allocation strategies as your life goals change.

Modeling Your Allocation

Scottrade’s Portfolio Review Tool outlines 5 asset allocation models, or Target Models, that provide a framework for risk and time horizon based on percentages in equities and fixed-income.

  • Conservative: 12% in cash, 58% in bonds and 30% in stocks
  • Balanced: 7% in cash, 43% in bonds and 50% in stocks
  • Moderate Growth: 2% in cash, 28% in bonds and 70% in stocks
  • Growth: 2% in cash, 13% in bonds and 85% in stocks
  • Aggressive: 2% in cash and 98% in stocks

“If you are concerned about losses, you should consider a more conservative allocation,” Correnti said. “Ideally, you would only make changes to your allocation plan as your goals change.”

What investment goals do you have where you could utilize an asset allocation strategy?

Next Steps: Scottrade clients can log in and access the Portfolio Review Tool. Not a client? You can open a new account.

The Target Allocation Models are designed to follow certain investment objectives, although there is no guarantee that these objectives will be met.

The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

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