Asset allocation helps investors control risk while seeking financial gains. Proper allocation protects investors from taking unnecessary risk while pursuing their financial goals.
Two examples of improper asset allocation:
- An InvestorKeep customer owned investments that were allocated to 87% aggressive growth. The customer was retired and probably did not need to be in such a high-risk allocation to support his lifestyle. The 2020 market crash resulted in a 40% decrease in the value of the overall market. Imagine having nearly 40% of your retirement accounts wiped out in just a few
months! In this example it would have been $1.6 Million and due to the customers age it would be hard to earn the lost money back. Asset allocation that matched his age and stage of life could saved him hundreds of thousands of dollars (and probably helped him sleep better at night).
- Another InvestorKeep customer discovered her asset allocation was far too conservative given her age and stage of life. As a result, her gains were severely limited. She was a long way from retirement and wanted to maximize potential earnings to accomplish her long-term goals. Her allocation in a mostly conservative portfolio was yielding an average of 3% annually. With a better matched allocation, she could afford to take on a bit more risk and receive better gains (say 6%). On a $100,000 investment the difference over 30 years would be $330K! According to Vanguard, asset allocation accounts for 88% of volatility and returns. When it comes to reaching your financial goals, it matters more than trying to pick winning stocks.