Are Tomorrow's Winners in Your Portfolio Today?

07.19.2017 - Viraj B. Patel, CFA

One of the fundamental laws of investing is that performance fluctuates—an investment that leads performance one year can lag the next. The challenge for investors is finding a way to take advantage of these shifting market dynamics without chasing performance. A disciplined, long-term asset allocation strategy developed by a professional investment advisor can accomplish that goal, preparing your portfolio for upticks in one investment category while cushioning the impact of pullbacks in another.

The Biggest Risk of All

Asset allocation is the practice of deciding how much of your investment portfolio should be invested in different types of investments—stocks, bonds, cash and alternatives—each with different risk and return characteristics. Usually, your mixture depends on your desired outcome (such as a stream of current income or long-term growth), when you want to reach your goal and how much volatility you’ll be comfortable with along the way. In the jargon of Wall Street, these metrics are your investment objective, time horizon, liquidity requirements and risk tolerance.

Because asset allocation can have a profound impact, it is widely recognized as one of the most valuable services offered by professional investment advisors. In other words, ignoring asset allocation over the long-term may be the biggest risk of all.

Smoothing Out Performance

Ideally, asset allocation helps reduce sharp fluctuations in the value of your portfolio by maintaining an allocation to investment categories that perform differently under a given set of market conditions. So strong gains in one category can help offset disappointing performance in another, smoothing out performance. A disciplined asset allocation strategy also reduces the risk of missing an opportunity to capture upside potential when an investment category rebounds.

Although it is possible for the performance of stocks, bonds and other major asset classes to fall into alignment, it is uncommon. It is even less common to see strong performance correlations across a full range of subcategories within those asset classes (see the discussion about diversification below).

Why is it so important to smooth out performance? Your success may depend on it. History shows that investors who experience less volatility in their portfolios are more likely to remain disciplined and stick to their investment strategy, focusing on long-term results rather than the distractions of the market’s short-term ups and downs. It alleviates the urge to make decisions based on emotion.

Diversification Goes One Step Further

The same principles that apply to asset allocation also apply to diversification. Within each asset class, Fiduciary Trust recommends a variety of subcategories that offer different risk characteristics and return profiles. For example, after determining how much of your portfolio should be allocated to stocks, we help investors diversify by making sure those stocks represent companies with different risk and return potential.

The stock market can be broken down in a number of ways, including geographically (US, international, emerging markets), by size (large-, mid- and small-capitalization companies) or by sector (healthcare, technology, utilities, etc.).

Diversification is important because certain events can have a detrimental effect on one industry while leaving another completely unfazed. If an economic crisis develops overseas, for example, it might have immediate impact on one industry or market sector while leaving another completely unaffected.

Why Diversify? Because Winners Rotate from One Year to the Next

Source: Strategas Resource Partners. See footnote 1.

Our Professional Approach

At Fiduciary Trust, our asset allocation process begins with a comprehensive assessment of 27 investment categories and the development of a long-term “capital market expectations” forecast. Then we create portfolios by combining asset classes that align most closely with your investment objective, risk tolerance and time horizon. The result is a long-term or “strategic” asset allocation plan that serves as the framework for our investment mandate and your Investment Policy Statement.

This detailed and disciplined approach to asset allocation is one of the most compelling reasons to work with a professional investment advisor. It can reduce portfolio volatility and alleviate the urge to constantly adjust your portfolio holdings in response to temporary market movements.

Fine-Tuning Your Allocations

Your allocations should not change dramatically unless you experience a life-changing event that alters your financial goals, risk appetite or investment timeline. Accumulating a large amount of company stock, for example, might require some adjustments in your portfolio to avoid over-concentrating on that particular stock or industry. Investors also tend to ratchet down their risk exposures as they grow older, their portfolios grow, and it becomes more important to preserve capital.

Fiduciary Trust’s research analysts, portfolio managers, asset allocation team and risk-management professionals also monitor economic indicators and global growth cycles for developments that might require tactical (temporary) adjustments. These changes can be modest, such as trimming exposure to an investment category that has appreciated considerably, or they can be more substantial, such as eliminating a certain asset class or building up cash reserves. In either case, we work closely with each client to make sure these tactical portfolio “tilts” move our clients one step closer to their long-term financial goals. 

Income or Growth? Asset Allocation Can Target Both

The proper asset allocation can help you achieve your goals, whether you want income for today, growth for tomorrow or a combination of both. The charts below show hypothetical annual returns over the next five to ten years for three different investment objectives: income, a combination of income and growth, and high growth.




See footnote 2.

1. Source: Strategas Resource Partners. Performance shown is for respective indexes which are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results. Diversification does not guarantee a profit or protect against loss. Certain asset classes carry relatively higher risks. Small capitalization stocks can be more volatile than large capitalization stocks. High-yield bonds have a higher risk of default and loss of principal compared to US investment grade bonds. Foreign investing involves special risks, including currency fluctuations, and political and economic uncertainty. Emerging markets stocks involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Investment in hedge strategies are speculative investments, entail significant risk and should not be considered a complete investment program.
2. This analysis assumes the reinvestment of income, is not based on actual portfolios and represents the expected return and risk of asset allocation strategies only. Expected returns are annualized estimates based on Fiduciary Trust’s proprietary, forward looking analysis of a weighted mix of asset classes. These expectations do not reflect the impact of client restrictions, cash flows, advisory fees and other expenses that you will incur as a client or the impact of future economic and market conditions. The actual performance of any security, asset class or portfolio will vary and could underperform or exceed Fiduciary Trust's expectations.

This analysis is provided for illustration and discussion purposes only and does not guarantee future results. Please speak to your Fiduciary Trust contact if you have questions or would like more information. This communication is intended solely to provide general information. The information and opinions stated are as of July 19, 2017, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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