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Strengthen your stock picking with the right asset allocation strategy

·Head of Distribution, Bell Direct
·3-min read
(Getty Images)

Thinking about risk tolerance and investment targets can help you determine which asset classes to invest in.

If a well-performing share market means you’ve been rewarded for your stock picking abilities this year, it could be time to up your investing game and start to think more strategically. Strategic Asset Allocation (SAA) allows you to have a portfolio strategy, where you set target allocations for various asset classes, then rebalance the portfolio at certain times.

By investing in different asset classes, such as shares, fixed income, property and cash, an SAA enables you to get the right balance of risk and return for your situation.

How Strategic Asset Allocation works

Breaking down your portfolio into asset classes allows you to set target allocations for each class. It also helps you consider your investment goals and the timeframe of your investments. When the portfolio starts to deviate from the original asset allocations due to different returns, it’s time to rebalance it according to your original allocations. All this together allows diversification, which in turn reduces risk, and allows you to lock in profits from the asset classes that have done well whilst topping up asset classes when they are potentially cheaper.

How to approach Strategic Asset Allocation

1. Work out your investment goals

Consider whether you’re investing for long-term growth or a more medium-term outcome. Perhaps you’re thinking about investing for your retirement, or maybe you’re investing with the idea of buying a house in the next few years. If you’re looking to build your wealth over longer time periods (a growth investor) then you might want to consider a higher allocation to growth assets such as shares. If you’re keen to earn a more stable income from your investments, you could look at fixed income investments such as bonds and hybrid securities, or shares with high levels of dividends. Bell Direct gives you access to all companies and ETFs listed on the Australian Securities Exchange.

2. Consider your investment timeframe

The longer you’re planning on keeping your investment, the easier it is to ride out any negative turns in the market. On average the stock market usually experiences one negative year in every five years. The good news is that markets go up over the long-term.

 3. What’s your risk tolerance?

In finance, risk is the possibility that an investment doesn’t deliver the return you expect, or falls in value. Financial analysts often quantify risk using a statistical measure of volatility called standard deviation, which shows how the returns from a particular asset have moved up and down over time, compared to their historical average. In general, assets with the highest long-term growth potential, like shares, also tend to be the most volatile, creating more risk in the short term.

4. Keep costs low

When you have decided how you want to proportion your assets, it’s essential to keep costs low. Managed funds or ETFs run by companies in the US charge a fee every year, regardless of how your investment performs. Check out Bell Direct’s ETF comparison filter to help you choose which ETFs to invest in. If you select your own stocks, you don’t pay ongoing fees. Some people choose to invest in a combination of both in order to keep costs low.

5. Diversify with the right SAA to minimise risk

Because different asset classes perform well at different times in the market, a diverse portfolio that includes a mix of growth and defensive assets can help smooth out returns. Combined investments usually mean that when stock markets fall a well-diversified portfolio across asset classes may not fall as much. 

Bell Direct is a simply better approach to online investing. Find out more about ETFs here. 

 

Important Disclaimer- This information is for educational purposes only and is of a general nature. It has been prepared without consideration of your specific financial situation, particular needs and investment objectives. This information does not constitute financial advice and you should consider your own financial circumstances in assessing the appropriateness of this information.

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