Category: Investments

Author: Tim Courtney

The Benefits of Asset Allocation

Date: 09/09/19

Many investors make decisions about investments, taxes, estate planning, future cash flow needs and future goals separately, as though each decision is distinct and won’t affect the others. This can lead to suboptimal outcomes for families. At Exencial, we believe all aspects of an investor’s financial life are interconnected and should be integrated into a cohesive strategy.


One of the last steps in integrating these financial decisions is asset allocation1, a strategy that determines how you will invest in order to meet future goals and cash flow demands. For example, you may want to retire early, save for your children’s college education or set aside money for charitable giving. These future cash outflows need to be met with cash inflows from investment assets, which is where asset allocation comes into play. When done properly, studies conducted by Vanguard2 and Morningstar3 have found that improving asset allocation decisions should improve returns and asset accumulation over time.


There are three primary investment asset classes we consider when building an asset allocation strategy.


1. Fixed income/preservation: This group includes money market deposits, bank certificates of deposit (CDs), Treasury bonds, corporate bonds and other various forms of debt that generate some amount of fixed income. These assets tend to be more stable and are accompanied by more muted price movements. However, this also makes for smaller returns over time compared to other asset classes.4 Fixed income investments often do not offer high enough returns to meet investors’ goals, which places a limit on the amount of assets we can allocate to this category.


2. Real assets/equity income investments: These are investments that give exposure to real assets5 or have a component of inflation embedded in expected returns (e.g., real estate, commodities, etc.), or those that behave like a combination of equities and fixed income (e.g., preferred stocks6, convertible bonds7 and master-limited partnerships or MLPs8). The expected returns for this asset class fall somewhere between those of equities and fixed income. Many investors are often drawn to equity income investments that offer 4 to 10 percent in annual income, but we recommend avoiding being too heavily invested here as this is a smaller area within the capital markets.


3. Equities/growth: This asset class includes U.S. publicly traded stocks, international and emerging market publicly traded stocks and private equity. While these investments often provide much higher returns than fixed income, they are also more volatile and involve greater risk.9 For investors who require income from their assets, it may not make sense to have an all-equity asset allocation. We see an average of three to four 5 percent pullbacks each year10 and do not want to be forced to sell assets trading at low prices because investments are concentrated solely in the equity market.


Based on each investor’s goals and planning considerations, there should be ranges of acceptable allocations to each asset class. Depending on an investor’s individual preferences, these ranges can then be narrowed to a specific weight.


For example, some people are more conservative by nature and may prefer to be at the higher end of the range within the fixed income/preservation category.Others are natural risk-takers and may want to be at the higher end of the equity allocation range.


We work with our clients to develop an asset allocation strategy that aligns with their financial planning needs and incorporates their preferences. If you have any questions about your current asset allocation, please contact your Exencial advisor.


Sources:

1. Investopedia – Asset allocation
2. Vanguard – Putting a value on your value: Quantifying Vanguard advisor’s alpha
3. Morningstar – Alpha, beta, and now…gamma
4. Investopedia – Fixed income
5. Investopedia – Real asset
6. Investopedia – Preferred stock
7. Investopedia – Convertible bond
8. Investopedia – Master limited partnership – MLP
9. Investopedia – Equity
10. CNBC.com – Grading the market: A routine pullback or has the trade war damned the S&P 500 to a trading range?


 PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971



About the author

4054781971

tcourtney@exencialwealth.com

Oklahoma City, Ok

Chief Investment Officer

Tim Courtney serves as Chief Investment Officer of Exencial Wealth Advisors and chairs the investment committee. He attained the Certified Investment Management Analyst (CIMA) designation in 2005 a... CLICK HERE TO READ MORE