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Build a Better Portfolio: Understanding Asset Allocation

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When it comes to investment success, asset allocation is key. Where you place your assets plays a critical role in controlling portfolio risk and return, and a sound asset uses specific strategies to lower overall portfolio risk while enhancing portfolio performance.

The Right Mix

It’s critical to find the right balance of risky growth seeking assets and stable predictable assets. Risky assets include stocks and other investments—such as high-yield corporate bonds, while stable assets include cash, short- to intermediate-term U.S. Treasuries bonds and other select high-quality investment grade corporate and municipal bonds.

A mix of these two types of assets allows the investor to control the riskiness and potential loss of the portfolio. The stable portion provides predictable returns, while the riskier assets have much more uncertainty with values that can change significantly over short periods of time.

The mix should match the goal—such as retirement or college savings—and should reflect the investors’ wiliness to take risk.

Diversify for the Long- and Short-Term

Diversification is a strategy to reduce overall portfolio risk by allocating the risky portions across several different asset classes.

Each asset class of investments share a common characteristic and tend to move together. Busey’s Investment Team divides the stocks by region and the market capitalization of the company, and they also consider the types of companies—such as real estate investment trusts—and certain types of bonds—such as floating rate notes—as unique asset classes. By thoughtfully allocating across these different asset classes, the sources of return are well-diversified. These assets have similar expected returns, but move differently on a day-to-day basis—decreasing portfolio risk while expecting the same overall return.

Investors should look to add asset classes that offer high potential returns similar to equities and more meaningful diversification.

Rebalancing Your Portfolio

As markets and investment goals change, it's important to periodically rebalance the asset allocations in your portfolio. With a consistent assessment of your portfolio, you can ensure your key life events are reflected in your investment strategy.

As assets increase in value and become a larger part of the allocation, it is imperative to rebalance your portfolio back to your target allocation. It is likely you  need to shift your allocation to reach your original target—controlling risk over time and potentially improving by selling expensive outperforming asset classes and buying more attractively valued underperformers.

Investors can further improve performance by being sensitive to valuations and the forward looking prospects of each asset class. A longer term performance (5 to 10 years) of a specific asset class is proven to relate to its fundamental valuation, such as price-to-earnings for stocks or yield for fixed income assets. Using this information to change the relative mix of assets while maintaining diversification offers another opportunity to further improve portfolio performance.

For more on asset allocation and portfolio diversification, contact Busey’s Investment Team today at 1.800.67 | Busey for a personalized analysis. To see the complete list of services our team provides, visit busey.com .

 

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