When planning for your financial future, asset allocation is one of the most important decisions you can make. It’s not just about diversifying investments; it’s about building a portfolio that aligns with your risk tolerance, financial goals, and market conditions.
At Arcwood Financial, we’re committed to helping you take control of your financial future. That’s why we’re excited to announce that we now offer free risk assessments for existing 401(k) participants and potential wealth management clients using the Riskalyze online risk assessment tool. This cutting-edge platform helps individuals determine their unique risk tolerance and provides a personalized portfolio recommendation.
Please watch the video below to see how Riskalyze works or click the link at the bottom of the article to start your free assessment now.
Riskalyze Video Introduction
Why proper asset allocation is critical and how it can enhance your long-term investment success.
1) Aligning Your Portfolio with Risk Tolerance
Your risk tolerance reflects your ability and willingness to endure market fluctuations. Asset allocation ensures your portfolio matches your comfort level with risk while pursuing your financial goals.
For example, younger investors often have a higher risk tolerance due to a longer time horizon, allowing for a heavier allocation in stocks to capture higher growth potential. Conversely, retirees or those nearing retirement typically shift toward bonds and other conservative investments to protect their wealth.
Understanding how your portfolio will react in different market conditions is key. During the 2008 financial crisis, for instance, the S&P 500 dropped nearly 37% (source: Morningstar). Investors with balanced portfolios (e.g., 60% stocks, 40% bonds) experienced significantly smaller losses because bonds held their value and provided stability. By contrast, portfolios overexposed to equities may have led to panic-selling and long-term financial setbacks.
The right allocation reduces emotional decision-making during market turbulence, helping you stay the course in achieving your goals.
2) Diversifying Across Domestic and International Markets
A well-diversified portfolio spreads investments not just across asset classes but also geographic regions. Domestic markets, like U.S. stocks, offer stability and familiarity, but they shouldn’t be the sole focus of your investments. Adding international equities and bonds introduces exposure to different economies, currencies, and growth drivers.
Historical data underscores the importance of geographic diversification. Between 2000 and 2009, often referred to as the “lost decade” for U.S. stocks, the S&P 500 posted a cumulative return of -9.1% (source: JPMorgan Asset Management). However, emerging markets during that same period delivered significant positive returns, offering a crucial counterbalance.
Including international investments ensures your portfolio isn’t overly dependent on one country’s economy. This diversification helps smooth returns and reduces the overall risk of significant downturns in any single region.
3) Achieving Steady, Long-Term Returns
Markets are unpredictable, and no single asset class performs consistently every year. A proper asset allocation strategy blends asset classes—such as stocks, bonds, and cash—to offset the volatility of one class with the stability of another.
For example, over the past 20 years, a portfolio with 60% stocks and 40% bonds produced an average annual return of about 6.4% with much less volatility than a portfolio entirely in stocks, which averaged 8.6% but with higher highs and lower lows (source: Vanguard). While the more aggressive stock portfolio may have higher potential gains, its steep downturns can discourage investors from staying invested.
Asset allocation doesn’t eliminate risk but helps moderate it, making it easier to remain invested and let compounding work its magic. This steadiness is critical for 401(k) investors, where consistent contributions over decades are the foundation of retirement success.
4)Achieving Steady, Long-Term Returns
Asset allocation isn’t a set-it-and-forget-it decision. Over time, market fluctuations can cause your portfolio to drift from its target allocation. For example, during a bull market in stocks, equity exposure can grow disproportionately, increasing your portfolio’s risk.
Historically, portfolios that rebalance annually not only maintain appropriate risk levels but also potentially add an extra 0.35% to 0.50% in annual returns (source: Vanguard Research).
Take Control of Your Financial Future
Whether you’re just starting your investment journey or are a seasoned 401(k) participant, a thoughtful asset allocation strategy can make all the difference. By aligning your portfolio with your risk tolerance, diversifying across domestic and international markets, and aiming for steady long-term returns, you’ll build a resilient strategy that weathers market fluctuations and helps you achieve your goals.
Riskalyze Assessment
Click hear to visit Riskalyze and take your free risk assessment today to receive a customized portfolio recommendation tailored to your unique needs.
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This material is for educational purposes only and should not be construed as financial, legal, or tax advice. It is not intended to serve as a solicitation or recommendation for the purchase or sale of any securities or investments. The S&P 500 Index is referenced in this article for illustrative purposes and represents a widely recognized measure of U.S. stock market performance. It is not available for direct investment, as the index itself is not a security. Past performance of the S&P 500 or any other index does not guarantee future results. Please consult with a qualified financial professional regarding your personal financial situation before making any investment decisions.
Arcwood Financial, LLC., Arcwood Benefits Consulting, Inc., and Arcwood HR, LLC. (dba Arcwood) are independent companies. Arcwood does not offer legal, tax or compliance advice. Brandon Oliver is an Investment Advisor Representative offering Advisory Services through Arcwood Financial LLC. a registered Investment Advisory Firm.
