With the market volatility we have experienced over the last two months due to COVID-19, many people are looking at their investment accounts and wondering if there is anything they should be doing differently. With that in mind, I thought it was important to address how you determine your portfolio allocation. Whether you are a do-it-yourselfer, or work with an advisor, your allocation should be based on 3 factors:

• Risk Tolerance – How do you feel about risk and the corresponding relationship to its potential reward? Essentially, how much fluctuation can you withstand over the long-term? Do you like to take big risks and can handle the highs and lows that come with those risks in order to achieve higher potential returns or do you prefer to play it safe, protect your money, and are willing to accept lower possible returns?

• Time Horizon – When do you need the money? Money that is needed for different time horizons should be managed differently because they face different risks. The shorter the time horizon, the more market volatility is a risk. The longer the time horizon, the more inflation (or loss of purchasing power) is a risk.
  • How do you apply this concept in real life? For example, money that is going to be used for a house purchase in 5 years should be managed more conservatively, because you do not have long enough time to make up a severe market downturn. However, money that is going to be used for retirement in 20+ years has enough time to weather the financial storm and could be allocated more aggressively.

• Goals – What do you need the money for? What rate of return does your comprehensive strategy say you need to be successful? Obviously, we cannot guarantee a specific rate of return, however, you can find an allocation that gives you the best probability of meeting that average rate of return. Knowing your goals not only affects how you invest, but also what type of account is best.
  • For example: If your retirement projection works with a 7% average rate of return, you do not need to have a 100% equity allocation because this exposes your accounts to more risk than necessary.

Because the 3 factors are intertwined with everyone’s unique situation, there is no one-size-fits-all investment approach. But what is probably most important, is to remember that once your allocation has been determined, you should only change your strategy if one of your 3 underlying factors has changed, not because of outside influences. We have no control or insight over what the market may or may not do, so focus on what you can control, and that’s understanding your situation well enough to develop a proper allocation.

Investments will fluctuate and when redeemed may be worth more or less than when originally invested. 3064751/DOFU 5-2020

Asset allocation, which is driven by complex mathematical models, cannot eliminate the risk of fluctuating prices and uncertain returns.