Commandment 3: Prioritize Asset Allocation

This is the third of a ten part series where we look at Haven’s Ten Commandments, a short list of investing fundamentals we like to teach to our clients. It’s nothing too fancy, but a good foundation we believe everyone should understand. 

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Imagine you're prepping a meal, drink or dessert for a group of friends or family. You can likely think back to a time where something was off .. it just didn’t taste right. Assuming the ingredients haven’t expired, the culprit is almost certainly going the recipe - the proportions - the mixture of the ingredients. So let’s talk recipes:

Last time we looked at a few of our investment options: stocks, real estate and bonds. I like to look at these "asset classes" as ingredients and the "asset allocation" as the recipe. Investment options gives us the ingredients we need, but nothing about the end product will taste right if we don't have the correct combination. Our asset allocation works as a handcrafted, secret recipe. It's how we customize our portfolio specifically for us and in such a way that it will work in our best interest. 

Ensuring we have the right recipe for our investments will prevent us from pouring two cups of salt into our Caesar when it only calls for a pinch.

Believe it or not, asset allocation may be the single most important aspect of our entire portfolio. Which asset classes you choose and what proportions you give them play a much larger role than the timing or selection of individual investments. The reason is this:

Even if you’re the best stock picker, you won’t even beat a bad stock picker if your allocation to stocks is 20% and their allocation to stocks is 80%.

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A general rule of thumb is the longer you have to invest towards your goals, the more aggressively you should invest your money. For example, when planning for retirement, a common trick is to subtract your current age from 100, the answer gives you an idea of what percentage of your portfolio should be invested in stocks (100 - 25 (age) = 75 (% stocks), 100 - 50 (age) = 50 (% stocks). In reality, a beautiful asset allocation is much more precise and should be built according to your goals, sophistication, and tolerance for volatility.

By investing aggressively you do open yourself up to the possibility of short term decreases but at the same time you open yourself to the potential for larger potential returns. Historically speaking, the good years heavily outweigh the bad years. So even if you don’t like risk or the idea of taking it, it helps to focus on sticking to the plan and knowing that overtime the longer you invest the more your account will grow - and the smaller the potential for losses. Even in a historic down year, markets recover quickly and grow from there. An event like the subprime mortgage crisis in 2008 would look like a tiny blip over your investment lifetime. 

As you move closer to your goals (buying a house at XX age, retirement at XX age, etc.) moving your investments from mostly high volatility (stocks) to low volatility (bonds) will allow you to be in a position where you can still expect returns but are also limiting your exposure to a market setbacks. The last thing I’d want to tell a client closing in on retirement is that they have to work another year or two because the markets experienced a down year within a couple years of their retirement date. 

By utilizing asset allocation to its fullest, we are attempting to capture as much gain as we can and then protecting your investments from downside when it matters most (when you are approaching to having to use them). 

At Haven we believe that working closely and diligently with our clients, to understand all of their financial goals and keeping up to date with them, will let us service our clients to their best interest. We like to be actively involved and believe it is the best way for an investor to help manage the turbulence of the markets.

If you have any questions about asset allocation, investing in general or learning about how Haven can help you, please do not hesitate to reach out.

Derek Condon 
Financial Advisor

Josh Olfert