All About Asset Allocation and Its Importance – PillarWM

At Pillar Wealth Management, we are a private, white-glove wealth management firm that works exclusively with ultra-wealthy individuals and families with liquid investable wealth ranging from $5 million to $500 million. We offer a variety of financial and investment advisory services such as risk management, investment management, tax management, retirement income planning, estate planning, asset allocation, and much more. Our experienced and committed wealth managers are determined to assist our wealthy clients in attaining all their long and short-term financial goals and achieving financial serenity. Get in touch with our team to discuss your financial targets and start your journey of becoming financially successful!

What Is Asset Allocation?

Asset allocation is an investment portfolio strategy that aims to strike a balance between risks and returns by apportioning a portfolio’s assets among major categories such as stocks, bonds, cash, derivatives, and real estate. This division, or allocation, is usually done in accordance with your financial goals, investment horizon, and risk tolerance.

Since every asset category offers varying levels of risk and return, each will perform differently with time. For example, if one asset category increases in value, another category might fall in value or might not increase by the same amount. Some people believe this strategy generates moderate levels of returns. However, for most investors, it’s the best tactic against a major loss if things go awry in one investment category.

All in all, asset allocation spreads out risk among several asset categories that behave independently during varying economic circumstances. To find out more on asset allocation, read our hardcover book, The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies for Families Worth $25 Million to $500 Million.

What Is the Importance of Asset Allocation?

Your asset allocation strategy is the most essential factor in determining the performance and overall success of your investment portfolio. Asset allocation can significantly influence how your investments perform and grow with time. Consequently, it can impact how soon you accomplish your financial goals, lower risks associated with your investments and manage investment expenses and costs.

Here is everything you need to know about the importance of asset allocation.

Meeting Your Long and Short-Term Financial Targets

Being an ultra-high net worth individual, you probably have a set of long-term as well as short-term financial targets. All these objectives, to some extent, depend on your investment plan and, more specifically, your asset allocation strategy.

Thus, if you wish to meet those targets as soon as possible, you need the ideal asset allocation plan for it. For example, if you have a short-term target of purchasing a luxury car, you might have to distribute your assets in a manner to give you high and steady returns. In the same way, if your objective is to just save for retirement, you would want to invest in assets that will increase your wealth over time and result in profitable gains.

This is another reason highlighting the importance of asset allocation for high net worth and ultra-high net worth individuals because it can be adapted to your life goals and which stage you are in your life. Your asset allocation plan in your 30s will be completely different from your plan in your late 50s. As you age, as your family expands, as your financial circumstances change, as the market evolves, you might also want to modify the way your assets are allocated.

As your wealth manager will possibly recommend, you need to alter your asset allocation plan as other factors change. If your wealth manager advises you to keep the same asset allocation for the rest of your life, you might be headed towards an extremely uncertain retirement. Read this guide to learn other signs that signal your financial advisor is not fit for the job.

Risk Management

Asset allocation is also vital for risk management. Financial markets can be highly unpredictable and volatile. This can mean that your investments can suddenly turn into losses. Several high net worth families and even ultra-high net worth individuals find themselves bankrupt due to unpredictable market volatility and shifts.

However, the good news is that asset allocation can help you diversify your assets across various categories of assets and lower your losses in case of any sudden market shifts. In addition, you also require a competent financial advisor for such a job, like those you can find at Pillar Wealth Management. Our wealth managers have access to over a century of financial market data and use intelligent forecasting techniques to come up with the perfect asset allocation plan that can keep your wealth secure by withstanding erratic market conditions. For more details on how you can avoid unnecessary risks while maximizing investment performance, read our guide, Improving Portfolio Performance.

Cost Management

Every financial transaction you undertake results in some expenses and costs, generally in the form of taxes. Taxes can eat away a fair percentage of your wealth, and that’s why when you’re developing your investment plan, you need to consider how it will influence your costs. Some types of asset allocation can yield an extremely high tax bill, which can be a huge drain on your overall wealth.

Nevertheless, if you have an optimum asset allocation plan, you can balance out high gains and low costs. Even if it’s not taxes, certain investments do undergo some losses. Its your job to keep such losses at the bare minimum, and the method to do so is through balanced and optimized asset allocation. Want more information about how the right asset allocation can lead to better cost management? Get in touch with our financial experts today!

Asset Allocation Takes Advantage of Time

When it comes to investment decisions, time is your biggest and most important resource. Even for retired wealthy individuals in their 60s or 70s, a well-thought-out asset allocation secures you in these crucial years when your focus shifts to ensuring your wealth lasts throughout your life.

However, if you’re an investor in your 40s or even 50s, a well-planned asset allocation allows you to ensure the long-term performance and growth you need to attain all your financial and lifestyle goals.

You’ll stay afloat during the short-term storms and grow during the boom periods. Over one, two, and three decades, you will gain much more than you’ll lose when you use proper asset allocation techniques.

All About Asset Allocation Models

There are several asset allocation models that use various investment strategies to generate capital gains. This might lead you to think, “What are asset allocation models?” Well, many asset allocation models lie in between four goals – preservation of capital, growth, income or balanced.

Preservation of Capital

Asset allocation models aimed to preserve capital are mainly for individuals who want to utilize their wealth during the next one year and don’t want to even risk losing a small amount of the principal value instead of the associated capital gains. If you wish to acquire a business, purchase a house, you might seek this particular asset allocation model. Paper money and its direct alternatives such as treasuries, commercial paper, and money markets generally make up around 80 percent or more of these portfolios. The biggest risk is that the returns generated may not be sufficient to beat inflation, diminishing purchasing power in the process.

Income

This kind of asset allocation model comes with minimal risk and is appropriate for short-term or mid-range time horizons. People who are nearing retirement generally opt for an income-oriented model. It comprises coupon-yielding bonds and dividend-paying stocks. Thus, it usually follows the ratio of 70 to 100 percent in bonds.

Balanced

A balanced asset allocation model offers moderate levels of growth and invests in a combination of both bonds and stocks. This kind of allocation strategy is what is regarded as a moderate portfolio allocation. A moderate portfolio can result in average yearly gains of 7 to 8 percent, with the maximum returns going up to 20 to 30 percent and a decline of around 20 to 25 percent.

Growth

Comprising primarily of stocks, this kind of asset allocation model has long-term gains potential with higher levels of risk and fluctuation. This is more suitable for investors who desire to get high returns over a long period of time and are open to taking higher risks. Thus, it generally follows the ratio of 70 to 100 percent stocks.

At Pillar Wealth Management, our team has been providing tailored asset allocation strategies to affluent clients such as yourself for over three decades. Contact our team to find out which asset allocation model best fits your requirements and needs.

What Is the Correct Asset Allocation?     

If you are thinking, what is the correct asset allocation, you need to first understand that asset allocation for high net worth and ultra-high net individuals is generally more aggressive than the regular investors with the objective to result in higher returns.

However, this doesn’t undermine the importance of smart investing. We suggest investing 60 percent of your wealth in high-risk investments and the remaining 40 percent in low-risk investments to ensure that your portfolio yields the maximum possible returns and is less volatile during economic downturns.In this guide here, we outline the five paradigm shifts you need to make to get the highest possible investment performance.

An effective portfolio asset allocation is what you need to keep yourself safe from unpredictable and volatile market conditions. While bonds and cash are more stable, equities increase and decrease in value. Thus, an optimized asset allocation can ensure that you stay financially secure.

Here are some tips to help you determine what is going to be the right asset allocation for you.

1. Asset Allocation Depends on Your Goals

Whether you want to purchase a yacht, or a vacation home, build a healthy retirement fund, you need to consider your life goals when identifying the right asset allocation strategy.

For instance, if you wish to own a retirement condo by the beach in 25 years, you don’t need to stress over short-term market variations in the stock market. However, if your child will start college in the next four to five years, you might want to shift your asset allocation to safer investments.

2. Asset Allocation Changes with Your Life Stages

Your asset allocation will have to change as you move through the various stages in life. Thus, you might want to switch over a portion of your assets to a different asset category prior to significant life changes. For example, if you have ten years left for retirement, you might move 10 percent of your investments into an income-oriented asset allocation model every year. By the time you retire, your complete portfolio will reflect your new goals.

Hiring a financial advisor can help you with this process. However, keep in mind that all financial advisors aren’t skilled to cater to the needs of affluent clients. Hence, you need to conduct research into your financial advisor’s qualifications and credentials before you commit to one. Our helpful guide here can help you in this process.

Hire Pillar Wealth Management

At Pillar Wealth Management, we are adept at taking pragmatic steps to enhance your portfolio performance while securing your wealth and assets. We can develop a fully personalized portfolio for your goals, objectives, and needs to help you attain true financial serenity. Speak to us to get the most suitable asset allocation plan today!

 

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