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Are you wondering if your investment portfolio is still aligned with your goals? This article explores how market shifts and personal circumstances may signal it's time for a review. Questions around two key principles for managing portfolios are addressed.
Market swings often prompt investors to reassess their portfolios. To evaluate the efficacy of investments in light of financial goals, it’s important to revisit two key principles—asset allocation and diversification. Any long-term investment plan will most likely have to weather market “ups” and “downs.” Softer markets often create opportunities for purchasing shares at lower prices, and through dollar cost averaging, investors may be able to average a lower cost per share over time. Maintaining a regular investment program and balancing portfolios to account for a comfortable risk level are important to the overall success of financial strategies.
The main objective of asset allocation is to match the investment characteristics of the various asset categories (equities, bonds, cash, etc.,) to the most important aspects of the personal investment profile—that is, risk tolerance, returns and liquidity needs, and the time horizon. Asset categories generally react differently to economic fluctuations.
If an investor assembles assets without careful planning, then they won’t likely know the extent to which the investments are (or are not) consistent with the overall objectives. Since various investment categories have unique characteristics, they rarely rise or fall at the same time. Consequently, combining different asset classes can help reduce risk and improve a portfolio’s overall return. While there is no set formula for asset allocation, guidelines can help to accomplish certain goals (for example, the need for growth in order to offset the erosion of purchasing power caused by inflation).
Diversification is an investment strategy used to manage risk for the overall portfolio, using techniques such as mixing holdings to include a variety of stocks (small-cap, mid-cap, and large-cap), mutual funds, international investments, bonds (short- and long-term), and cash. By varying investments, diversification attempts to minimize the effects that a decline in a single holding may have on the entire portfolio.
To maintain a regular investment program, many investors make dollar cost averaging an integral part of their overall savings plan. Using this systematic investing technique, an investor spends the same amount each period on the asset, but due to market trends, the money buys more shares when prices are low, and fewer shares when prices are high. This may result in a lower average cost per share than purchasing a constant number of shares at the same periodic intervals or if making a one-time large investment.
Dollar cost averaging cannot guarantee a profit or a lower cost per share, nor can it protect against a loss. However, it is a strategy that reinforces the discipline of regular investing and offers a systematic alternative to “market timing.” In order to take full advantage of dollar cost averaging, the investor needs to consider continuing purchases through periods of market down-turns. Periods of falling prices are a natural part of investing, as are strong market intervals. It is important to regularly review the portfolio and meet with a financial professional to help ensure the investment strategies remain aligned with the overall financial objectives.
