The Golden Rule of 3 for Asset Allocation

By SAGE Private Wealth Group
The Golden Rule of 3 for Asset Allocation

When it comes to long-term investing as part of a financial life plan, a golden rule is not to have all your eggs in one basket. Instead, your portfolio should be constructed considering your risk tolerance, time horizon, and investment objectives, which come together in the form of your asset allocation.

Asset allocations are determined based on your risk tolerance, time horizon, and investment objectives

If you look at your portfolio as a pie chart, different slices of pie should represent different asset classes. These pie slices will also be of different sizes, dependent on the weighting of how much is invested in each asset class. Each asset class will have an independent responsibility. For example, equities will drive growth in a portfolio, whereas bonds or fixed-income will help provide stability. Portfolios built to be more aggressive will have a larger slice of the pie geared towards equities than fixed income.

Your asset allocation is like a sailboat: the equities are the sail that will capture wind and push the boat forward, whereas your bonds are the rudder that you use in your effort to keep your boat steady on choppy waters.

One other concept of long-term investing that comes to mind when trying not to have our money all in one place is the idea of diversification. Diversification is a strategy that focuses on the investment selection within asset classes to limit exposure to any one particular risk. Diversification is not the same as having investment accounts at multiple financial institutions. The risk here lies in the likelihood of overlap between your investment strategies, thus negating any intended diversification.

The beginning of the year is an excellent opportunity to revisit the variables that make up your asset allocation.

A good way to prepare for this conversation with your Wealth Advisor is by making sure to share all investment account statements that would make up your complete financial picture. The objective of these reviews is to make sure your financial life plan continues to portray an accurate reflection of your life. If you haven’t scheduled this review yet, make sure to contact your Wealth Advisor or a member of SAGE Private Wealth Group. Let’s uncover how asset allocation and diversification can be the catalyst of your very own financial life plan.

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