{"id":174760,"date":"2023-03-31T21:11:57","date_gmt":"2023-04-01T04:11:57","guid":{"rendered":"https:\/\/inbusinessphx.com\/?p=174760"},"modified":"2023-03-31T21:11:57","modified_gmt":"2023-04-01T04:11:57","slug":"determining-strategic-asset-allocation","status":"publish","type":"post","link":"https:\/\/staging.inbusinessphx.com\/?p=174760","title":{"rendered":"Determining Strategic Asset Allocation\u00a0"},"content":{"rendered":"

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A strategic investment strategy backed by a comprehensive financial plan can help provide comfort in a volatile market. Below, we explore how asset allocation should be customized to an individual\u2019s goals and risk appetite.\u00a0<\/span><\/p>\n

Establishing Goals\u00a0<\/span><\/b><\/h3>\n

One of the most important steps to building asset allocation is to establish goals, along with a timeline, with one\u2019s financial team. There will likely be multiple goals that are top-of-mind at the beginning of any discussion of asset allocation. Creating an outline will help in prioritizing them and discussing risk tolerance.<\/p>\n

Understanding Risk Tolerance\u00a0<\/span><\/b><\/h3>\n

When determining risk tolerance, a financial team generally seeks the least amount of risk that must be assumed to achieve the goals within the stated time horizon. As the holding period of the S&P 500 is extended, the less volatile the annualized returns become. By the time it reaches 15-year holding periods, it\u2019s a reasonably flat line.\u00a0<\/span><\/p>\n

The statistics play out in the table below:<\/p>\n\n\n\n\n\n\n\n\n
Holding Period<\/b><\/th>\n1 Year<\/b><\/th>\n3 Years<\/b><\/th>\n5 Years<\/b><\/th>\n10 Years<\/b><\/th>\n15 Years\u00a0<\/span><\/b><\/th>\n<\/tr>\n<\/thead>\n
Average Annualized Return<\/td>\n9.26%<\/td>\n8.08%<\/td>\n7.68%<\/td>\n7.18%<\/td>\n6.64%<\/td>\n<\/tr>\n
Max Return<\/td>\n53.71%<\/td>\n30.07%<\/td>\n26.18%<\/td>\n16.75%<\/td>\n15.74%<\/td>\n<\/tr>\n
Min Return<\/td>\n-44.76%<\/td>\n-17.28%<\/td>\n-8.48%<\/td>\n-5.08%<\/td>\n-5.86%<\/td>\n<\/tr>\n
Batting average\u00a0<\/span><\/td>\n73.8%<\/td>\n84.6%<\/td>\n84.4%<\/td>\n92.4%<\/td>\n96.3%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Source: UMB Internal Data<\/i><\/p>\n

As the holding period is extended, the extreme results begin to mute, with best and worst results becoming less extreme. Additionally, the batting average (the percentage of positive returns) increases. By the time of reaching an average 15-year holding period (see chart), there will have been a loss of money only 3.7% of the time, most of which will have occurred during the depression.<\/p>\n

Another important distinction is one\u2019s ability to take risk. Those who have established a larger base of investable assets will likely have more options than those who are just beginning their investing journey.\u00a0<\/span><\/p>\n

As risk tolerance may change as one journeys through life, this should be discussed as part of a regular financial review so items can be adjusted as needed.\u00a0<\/span><\/p>\n

(Note: All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results.)<\/i><\/p>\n

Customizing the Asset Allocation\u00a0<\/span><\/b><\/h3>\n

Once goals, timeline and risk tolerance have been established, it\u2019s time to build the asset allocation.\u00a0<\/span><\/p>\n

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This graph represents possible portfolios available in terms of annual return as well as risk (or variation) around that average annual return. For example, if the goals require a 6% average return, a lower bound can be set that excludes portfolios that won\u2019t meet those goals.\u00a0<\/span><\/p>\n

If the profiling process establishes a 12% annual volatility limit, this creates another constraint on portfolio choices. is the planning might come down to a single portfolio in the unshaded area that will both meet the return goals as well as stay within the risk parameters. This is how financial planning and preference profiling interact to allow advisors to deliver a customized solution.<\/p>\n

Any strategic asset allocation should include a blend of asset classes that reflects both risk tolerance and the timeline given to achieve specified goals. Following are a few of the most used:<\/p>\n