The right portfolio for you is the one that reflects your personal investment plan. Following some fundamental principles of portfolio construction can help ensure that your portfolio weathers any conditions that the market might throw at it.
Here are four “wheels” to help keep your portfolio on the road to achieving your goals:
1. Have a plan
Before you can build an effective all-weather portfolio, you should have a proper investment plan. Your investment plan should be personalized and unique to you. It should reflect your specific investment goals, and should accurately capture your risk profile.
Your risk profile is the mix of your risk tolerance, risk capacity and your time horizon, as well as any specific needs you may have, such as income, capital preservation or growth. Ultimately, your plan will determine where you fall on the risk scale: from very conservative to aggressive growth.
2. Establish and maintain an appropriate asset allocation
Once you have your investment plan in place and your risk profile established, you can determine your asset allocation across the three main asset classes: cash, fixed-income and equities. Generally, the more conservative your risk profile, the more fixed-income (such as bonds) your portfolio will hold; the more aggressive, the more equities (such as stocks).
Maintaining this asset allocation over time, rebalancing when necessary, helps ensure that your portfolio doesn’t drift to an asset allocation that no longer reflects your risk profile. That way, it remains ready for volatility and/or periodic changes in market conditions.
3. Diversify your portfolio’s holdings
Heard about not having all of your eggs in one basket? It’s true for portfolio management, but in that case it’s about more than not just concentrating your assets in one particular asset class. With a portfolio, it’s important to diversify your investments over different sectors, industries and even geographical markets. How does this apply to your all-weather portfolio? Because different investments and markets move in different ways at the same time during a market cycle, and respond differently to changes in economic factors (e.g., inflation, changes in monetary policy, the outlook for corporate earnings or the economy). So when you diversify, you benefit from the opportunities across different investments as they emerge, which in turn can smooth out volatility and generate a better investment experience.
4. Focus on quality assets to achieve your goals
An all-weather portfolio should be built with quality investments that generate long-term, sustainable returns. Picking stock and bond issuers with a solid track record of being sector and/or industry leaders, and that deliver quality earnings over time, are generally less volatile. While lower quality issuers and companies can provide higher potential returns, they also contain additional risk and are often more volatile than stalwart industry leaders.
Ask us for more information about building an all-weather portfolio to get you through any market conditions – and, most importantly, keep you firmly on the road to your goals.
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