Why Asset Allocation Matters for Long-Term Investors

The beauty of constructing a portfolio comes in the range of options available to investors in terms of how one decides to diversify one’s assets, and how one decides to allocate capital across asset classes.

The typical asset classes most investors focus on are equities (stocks), fixed income (bonds), and cash. Having some mix of these three fundamental asset classes is important in managing portfolio risk and maintaining flexibility with respect to capital inflows and outflows to and from said portfolio.

With the purpose of most investment portfolios being a mix of growth and income, pulling money out of one’s portfolio is often a focus of many investors in need of regular income. Thus, having enough cash in one’s portfolio to cover withdrawals for a specific amount of time is one strategy often sought by investors who are pulling money out on a regular basis or who anticipate they will be pulling money out in the near future.

Subsequently, having a high enough percentage of one’s assets in dividend-yielding equities and fixed income securities is one way to ensure the cash flow coming from one’s portfolio will be enough to support the required withdrawal amount over a long period of time.

Having a significant percentage of income-generating securities which grow distributions over time would therefore be helpful.

Equities should take up the remainder of one’s portfolio once cash reserves and income generation levels are considered; picking and choosing companies which fit into one’s long-term strategy will likely result in the highest percentage of long-term gains and should therefore take the most amount of time relative to the two aforementioned asset classes.

 

Invest wisely, my friends.