Most people who purchase stocks, bonds, mutual funds, or other investment vehicles understand the risks associated with investing but believe that the potential growth they may realize over time outweighs such risks. However, because there are no guarantees, investing assets can be a nerve-wracking experience – especially during periods of market turbulence.
Taking a deliberate approach to financial asset management and working with a financial professional, rather than choosing to manage your portfolio, may help you weather the ups and downs of investing. This, in turn, may make it easier to stay the course over the long run.
Understanding the Elements of Financial Asset Management
Financial asset management encompasses several concepts, including diversification, asset allocation, portfolio management, and the decisions that go into choosing and evaluating the performance of your investment. Let’s explore each of these individually:
- Diversification. You have likely heard the adage, “don’t put all of your eggs in one basket.” The idea of diversifying your investment portfolio, which is a central tenet of financial asset management, is based on the idea of spreading risk by putting your investment dollars into multiple baskets. There is no one-size-fits-all strategy for how diversifying your portfolio. For one investor, a well-diversified portfolio may include just a handful of investments. For another, a portfolio with dozens of securities may be best. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
- Asset Allocation. While diversification refers to investing in more than one security, asset allocation is a deliberate approach to diversifying, investing a certain percentage of your overall portfolio into several different categories or asset classes, such as equity (stocks), fixed income (bonds), cash or cash equivalents, real estate, and more. Asset classes are often further broken down by types, such as international equity, small-, mid-, and large-cap equity, etc. The right mix of asset classes, and the percentage of your portfolio invested in each, should be based on several factors, including your time horizon, risk tolerance, investment experience, and ultimate goals. Asset allocation does not ensure a profit or protect against a loss.
- Rebalancing. Implementing an asset allocation plan tailored for you is not something you can do once and then forget about. Over time, the performance of the assets in your portfolio can cause your asset allocation to drift, so that one asset class may have a higher percentage than planned, while another makes up a lower overall percentage. When you work with a financial professional to manage your financial assets, you may benefit from periodic portfolio rebalancing, designed to bring your investments back into alignment with your goals and circumstances. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
- Evaluating Performance. Finally, financial asset management also involves monitoring investments and evaluating their performance against market indices or other benchmarks. Financial professionals use various tools and systems designed to look at yield, rate of return, transaction fees, and more, to help identify potential opportunities. This goes hand-in-hand with diversification, asset allocation, and periodic portfolio rebalancing.
Of course, nobody can predict what any particular investment product will do in the future. But, approaching financial asset management with a plan, and seeking guidance from your financial professional, may help ensure your investment portfolio is structured with your circumstances in mind.To learn more about financial asset management, contact CF Financial.