Financial Planning Fridays #3: Asset Allocation

Welcome to Financial Planning Fridays, our weekly video series on financial planning, where we work to simplify wealth management decision making for our clients so they can focus on what is most important to them.

Today we are going to focus on one of our favorite subjects: investment asset allocation. This is the mix of stocks, bonds, alternative investments and cash in your portfolio.

In a popular study completed years ago by the Financial Analysts Journal, there were three components that made up more than 99% of investment results – security selection, market timing, and asset allocation.

Almost all of the media attention and news that we all see is only focused on security selection and market timing. Should you buy Tesla or Apple? Should you buy stocks now or sell? However, these two areas combined were shown to only contribute about six percent to investment returns. The remaining 94% of the return was driven by asset allocation.

At Presilium stocks typically make up the largest part of our client’s portfolios. And the best skill to have when investing in stocks is patience. Patience is so important because, on average, the market is up:

  • 73% of the time over one year
  • 84% of the time over three years
  • 88% of the time over five years
  • 94% over 10 years and 100% over 20 years

Individuals that stay invested through the occasional market declines have been rewarded in the long run. And, if you can add to your stock holdings during declines, that is even better.

Determining asset allocation is dependent on the time horizon until those dollars are needed. For shorter-term goals, we use investments like bonds and CDs and money market that tend to have much less volatility than stocks but also have a lower expected long-term return. For goals longer than 5 years it almost always makes sense to invest in stocks.

It is so important to start with a financial plan first and then determine the best asset allocation for your specific plan and goals.

Our next video in this series we will take an in depth look at rebalancing and why that is so important to your financial plan. We can’t wait to share it with you!

For our clients who are retired, we like to keep at least five year’s worth of the income needed in bonds. This way we know that they have a cushion to draw from anytime the market is temporarily down.

In fact, one of the ways that we measure risk is not by looking at your stock to bond percentages, which we feel may leave you exposed to inflationary risks, but by looking at how many years of expenses we could cover with your current bond holdings.

Five years is a great starting place but we have clients that keep 10-15 years worth of retirement income in bonds. We then feel confident investing the rest of the portfolio in stock where the chance of gain over five years is 88% and much higher over longer periods of time.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.