“Strategic asset allocation” can be described as a portfolio strategy that involves setting target allocations for various asset classes, and periodically rebalancing the portfolio back to the original allocations when they deviate significantly from the initial settings due to differing returns from various assets.
While this is a lot to take in, it is very important to understand the strategy behind this allocation.
Asset allocation is one of the most important decisions that investors will make. In other words, your selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash and equivalents, which will be the principal determinants of your investment results.
The main purpose of Asset Allocation is to diversify among asset groups that act differently with the goal to reduce volatility of the portfolio as a whole. Studies1 have shown that asset allocation accounts for a majority of the total return of a diversified portfolio. In other words, timing the market and which individual stocks or ETFs are in a portfolio is less important than asset allocation choices.
Parros Financial Group works very closely with our clients to determine which assets are suitable for in their portfolio. Our knowledge and research is a critical part of our asset allocation process. Today’s investment environment is different from the 1980’s and 90’s when the markets were less volatile and interest rates were higher.
For many individuals, managing an investment portfolio has become too complex and difficult. The number of financial products available to individual investors has exploded in recent years. In addition, investors are continually bombarded with contradictory banter and “noise” from the financial media, and new financial scandals appear with discouraging regularity.
Is it not surprising that some investors are confused and do not trust the financial system? In search of guidance, you might receive biased or contradictory opinions from financial salespeople, the media, or even friends and relatives, which might get you sidetracked, confused, or worse.
We recognize that individuals today have increased expectations for prudent risk management and sophisticated asset allocation. We offer a disciplined, unemotional, and highly diversified investment approach that offers objective advice and solutions to problems.
Our investment approach is called asset class investing. It is an approach based on the science of investing that cuts through the noise and confusion by focusing on what really drives investment return, helps to reduce volatility, and simplifies the investment process.
1 Xiong, James, Roger G. Ibbotson, Thomas Idzorek, and Peng Chen. Forthcoming 2010. “The Equal Importance of Asset Allocation and Active Management.” Financial Analysts Journal, vol. 66, no. 2 (March/April).