Investing Strategies and Asset Allocation

A share of stock represents a tiny slice of ownership in a company. Investors buy and sell stocks to make a profit based on the company’s business performance and market fluctuations.

Before investing, consider your goals and how much risk you’re willing to take. Then choose a strategy to meet your needs.

Asset Allocation

A portfolio’s mix of investments is known as its asset allocation. It divides assets into different categories such as stocks, bonds and cash equivalents.

The percentage of your portfolio dedicated to each of these categories will determine your level of risk and investment return. A standard guiding rule is to allocate about 75% of your investments to stocks and 25% to bonds. It’s also possible to copy the asset allocation used by a target date fund, although that method will incur additional fees.

Investing in a diverse array of holdings can help protect you from big losses when the economy or markets fall. You can diversify within each asset category by spreading your investments among various sectors of industry, for example. You can also use tactical asset allocation to take advantage of opportunities, although that involves frequent changes and often requires expert knowledge of market trends. A financial advisor can help with this. 

Pooled Investments

Pooled investments combine funds from many investors into a single, unified portfolio. They can take the form of mutual funds, exchange-traded funds, hedge funds, unit investment trusts (UITs) and pension funds. These vehicles offer economies of scale, lower trading costs per dollar of investment and more opportunities for diversification.

They also enable small investors to gain exposure to markets and securities that would be out of their reach if purchased individually, such as stocks with high market values. Pooled investments also offer more stability in volatile market conditions and may provide tax benefits, depending on the vehicle’s structure.

Investors pay management fees to the pooled investment vehicle’s professional portfolio managers, who select direct investments for the pooled investment vehicle. Public pooled indirect investment vehicles, such as index mutual funds and ETFs, tend to have the lowest fees. These investment vehicles typically have a low cost because they do not require as much research on a day-to-day basis to select direct investments, which could result in higher transaction expenses.

Diversification

Diversification limits investment losses and improves chances of meeting long-term financial goals. However, it doesn’t eliminate risk or guarantee that a portfolio will achieve its intended results.

The most important diversification strategy involves buying different asset classes, such as stocks and bonds, to reduce the impact of any one class performing poorly. You also may want to diversify within an asset class by coupling investments that counterbalance each other. For example, investors who are concerned about a potential pandemic that may affect travel might consider investing in digital streaming platforms (positively impacted by reduced travel) while simultaneously holding airline stocks (negatively impacted by fewer travelers).

Time and budget constraints make it difficult for individual retail investors to diversify their portfolios on their own. Therefore, many people opt for mutual funds, which are designed to mimic the performance of a particular asset class or index. These can include stocks, bonds and commodities such as gold. They may have varying investment objectives and offer different levels of risk, depending on how they are structured.

Market Timing

Many investors use market timing strategies to try and predict price movements in financial assets. This may involve shorting (selling) at market tops or buying (buying) at market bottoms. It also involves using technical analysis and economic indicators to forecast market trends.

Trying to correctly predict the direction of prices is often difficult and time consuming. Moreover, the risk of being wrong can be high. For example, if you are trying to buy at the exact top of the market or sell at the exact bottom of the market, you might miss out on significant gains if you get it wrong.

Attempting to predict the beginning of bull markets and bear markets is nearly impossible without a crystal ball. Therefore, focusing on “time in the market” and staying invested for years instead of attempting to place bets on specific price changes is a much safer approach. It also offers better long-term returns.