Thinking about risk tolerance and investment goals can help you determine which asset classes to invest in.
If a performing stock market means you’ve been rewarded for your stock picking abilities this year, it might be time to improve your investing game and start thinking more strategically. Strategic Asset Allocation (SAA) allows you to have a portfolio strategy, in which you set target allocations for different asset classes and then rebalance the portfolio at certain times.
By investing in different asset classes, such as stocks, fixed income, real estate, and cash, an SAA allows you to achieve the right balance of risk and return for your situation.
How strategic asset allocation works
Breaking down your portfolio into asset classes allows you to define target allocations for each class. It also helps you consider your investment goals and the timing of your investments. When the portfolio starts to deviate from the original asset allocations due to different returns, it is time to rebalance it based on your original allocations. All of this allows for diversification, which in turn reduces risk, and allows you to lock in profits from asset classes that have performed well while complementing asset classes when they are potentially cheaper.
How to approach strategic asset allocation
1. Determine your investment goals
Decide whether you are investing for long-term growth or more medium-term results. You may be thinking about investing for your retirement, or maybe you are investing in the idea of buying a home in the next few years. If you are looking to build your wealth over longer periods of time (a growth investor), you may want to consider a higher allocation to growth assets such as stocks. If you want to earn more stable income from your investments, you may want to consider fixed income investments such as bonds and hybrid securities, or stocks with high dividend levels. Bell Direct gives you access to all companies and ETFs listed on the Australian Securities Exchange.
2. Consider your investment schedule
The longer you plan to hold your investment, the easier it is to overcome negative market reversals. On average, the stock market typically experiences a negative year every five years. The good news is that the markets move higher over the long term.
3. What is your tolerance for risk?
In finance, risk is the possibility that an investment will not provide the expected return or lose value. Financial analysts often quantify risk using a statistical measure of volatility called standard deviation, which shows how the returns of a particular asset have increased and decreased over time, relative to their historical average. In general, assets with the highest long-term growth potential, such as stocks, also tend to be the most volatile, creating more short-term risk.
4. Keep costs low
When you have decided on how you want to allocate your assets, keeping costs low is essential. Funds managed or ETFs managed by companies in the United States charge a fee every year, regardless of how well your investment performs. Check out the Bell Direct ETF comparison filter to help you choose which ETFs to invest in. If you select your own stocks, you pay no ongoing fees. Some people choose to invest in a combination of the two in order to keep costs down.
5. Diversify with the right SAA to minimize risk
Since different asset classes perform well at different times in the market, a diversified portfolio comprising a mix of growth and defensive assets can help smooth out returns. Combined investments usually mean that when the stock markets go down, a well-diversified portfolio across all asset classes may not go down that much.
Bell Direct is simply a better approach to investing online. Learn more about ETFs here.
Important Disclaimer- This information is for educational purposes only and is general in nature. It has been prepared without taking into account your particular financial situation, your particular needs and your investment objectives. This information does not constitute financial advice and you must take your own financial situation into account in assessing the suitability of this information.