The trademark of a successful portfolio is balance. In the past, a common diversification strategy was the 60/40 split. However, this traditional approach is by no means a foolproof formula for growing wealth, and investors should consider alternative asset allocation configurations.
“The most important key to successful investing can be summed up in just two words – asset allocation.” – Michael LeBoeuf, US business author, speaker and professor emeritus
Like Michael LeBoeuf famously said, asset allocation is among the top factors to consider when building your portfolio. This investment strategy’s primary focus is to strike a risk-reward balance through a combination of asset classes that promotes an individual’s investment goals and horizon, all while keeping their risk tolerance in mind.
How you divide your money between asset classes is ultimately more important than choosing individual private equities, stocks, bonds, and cash (equivalents). Regardless of how significant the majority of financial advisors agree asset allocation is, there’s still no one reliable formula to determine an individual’s ideal asset allocation.
Although working with a global investment management firm like IFSA, which has a track record of excellence, is sure to result in a well-balanced portfolio, whatever your individual needs or preferences.
The impact of individual needs on asset allocation
An individual investor’s desired timeline and risk tolerance are two of the greatest determinants to consider when compiling an investment portfolio.
Preferred Time Horizon
Your time horizon refers to the period before you see your return on investment. When you need your money sooner than later, it’s best to allocate your funds to short-term cash assets such as money market and savings accounts. Although you don’t earn that much interest, the risk remains relatively low, and you won’t experience any significant losses.
However, suppose you’re willing to wait for several years to access your money. In that case, you would benefit from more high-risk, high-growth asset allocations such as stocks and private equity funds. These kinds of investments can lose value over the short term but typically recover again over time.
Your investment goals will further determine which assets are right for you. If you’re saving for retirement, your allocations should be more conservative. On the other hand, if you have a vague goal, like going on an overseas vacation sometime in the next ten years, you can afford to take more risks.
Individual Risk Tolerance
Your risk tolerance refers to how willing you are to risk losing your original investment for the chance of seeing a greater return. While some individuals are comfortable facing big market fluctuations, others aren’t. Your risk tolerance will affect how you allocate assets according to aggressive and conservative investments. Aggressive investments include stocks and private equities, while examples of conservative ones are cash and bonds.
It’s vital to recognise that, no matter your investment route, you will lose money at one point or another – even if only due to inflation. Ultimately, the size of those losses depends on your risk tolerance and the asset allocation you choose.
Moving away from the traditional asset allocation model
A 60/40 portfolio mix remains a popular asset allocation choice for many investors. Plenty of financial advisors still recommend this traditional model and typically see investors dedicate 60% of their portfolio to stocks and 40% to fixed-income assets like bonds.
The 60/40 split was designed to work in two ways:
- When the stock market is doing well, 60% of the portfolio invested in stocks will flourish.
- And during periods when stocks aren’t performing well, the 40% allocated to fixed-income assets will prevent you from losing too much.
It’s important to remember that although bonds don’t always do better than stocks in hard times, they tend to, making this a strategy to help you weather the storm.
The 60/40 portfolio’s past success lies in the fact that, for roughly 20 years, bond and stock prices moved in opposite directions. When one went up, the other went down. This helped balance these portfolios, allowing them to do well in fluctuating market conditions.
However, if recent years’ market uncertainty, caused by events like the COVID-19 pandemic and rising inflation, has taught investors anything, it’s that no method is failproof. In fact, the 60/40 split suffered a major setback in 2022 when both stocks and bonds performed dismally in the first nine months of the year.
Consider an alternative asset allocation
Including alternative assets, such as private equities, during portfolio allocation can provide diversification benefits and potentially lead to higher returns.
As the name implies, private equity investments consist of private companies that aren’t publicly traded. This provides exposure to different market sectors and economic drivers than the usual public equities.
Private equity investments are especially perfect for individuals with higher risk tolerances and longer time horizons. That’s because they require greater holding periods, which makes them less susceptible to short-term market fluctuations. And despite private equities having higher fees and minimum investments, as well as greater illiquidity when compared to traditional public equities, they’re very much a worthwhile asset allocation to the right investor.
Partner with IFSA for tailored asset allocation solutions
At IFSA, we appreciate that each individual has unique investment requirements. With over six decades of combined industry experience, our core team has the expertise to identify the ideal alternative assets to bolster your or a client’s investment strategies.
Ultimately, solid portfolio management makes all the difference. IFSA manages two funds – one domestic, one international – and will determine the best asset allocation options for you from said funds.
Contact us today for a free consultation. We can discuss your particular needs and which allocations are bound to help you achieve your investment goals during your preferred investment period.
IFSA (Pty) Ltd Registration No. 2000/005153/07 An Authorised Financial Services Provider Licence No. 43337