Broker Check

Back to Basics: Asset Allocation Still Matters

| March 06, 2023

Coming off a year of market volatility, I wanted to reach out with some important investment concepts that have stood the test of time. Let’s start with asset allocation.

Asset allocation has worked 

Asset allocation balances investment risk and reward as you build your portfolio, creating a mix of asset types based on your financial goals, risk tolerance, and time horizon. Asset allocation is an approach to help manage investment risk. It does not guarantee against investment loss.

There are many asset classes, and each has a different risk/reward potential. For example, from 1926 to 2021, we can look at a portfolio that maintained an allocation of 60% stocks and 40% bonds. It posted an average annual return of 8.7%. Perhaps more importantly, it posted a gain in 77 of the 96 years.1

Remember, past performance does not guarantee future results. Stock prices’ return and principal value will fluctuate as market conditions change. In addition, shares, when sold, may be worth more or less than their original cost.

What happened in 2022? 

Unfortunately, 2022 was one of those years where the 60/40 portfolio was down. Many were caught off guard by the drop in the stock market and were frustrated to learn that higher interest rates lead to lower bond prices. Bond prices have an inverse relationship with yields, so as interest rates rose, bond prices fell.

The benefits of Asset Allocation going forward. 

Bottom line—when the going gets tough, following a sound financial strategy may be the one thing that matters when investing.

If you would like to discuss any of this further, please give me a call or send me an email. I look forward to hearing from you.

1, 2023. For U.S. stock market returns are represented by the Standard & Poor’s 90 Index from 1926 to March 3, 1957, and the Standard & Poor’s 500 Index thereafter. U.S. bond market returns are represented by the Standard & Poor’s High Grade Corporate Index from 1926 to 1968, the Salomon High Grade Index from 1969 to 1972, and the Barclays U.S. Long Credit Aa Index thereafter. Index performance is not indicative of the past performance of a particular investment. Individuals cannot invest directly in an index.