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Asset Allocation Strategies to Safeguard Your Wealth

By Dan Caplinger - Jul 4, 2017 at 6:25AM

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Find out how to draw the right balance for your needs.

Putting all your investment eggs in one basket is extremely risky. You can earn amazing returns, or you can lose everything. Through asset allocation strategies, investors seek to diversify their investments and safeguard their wealth from what would otherwise be cataclysmic declines. In particular, the following strategies can help you meet the dual needs for ongoing portfolio growth and protection of your investment capital from loss.

The challenge of threading the needle

The primary problem in picking an asset allocation strategy is that investors have conflicting needs. If the only thing you want to do is to ensure that the dollar amount of your savings nest egg doesn't go down, there are plenty of ways to do so. Bank certificates of deposit and U.S. savings bonds are some of the simplest ways to ensure that you'll never lose money.

However, simply keeping the dollar value of your portfolio stable or rising slowly isn't enough for most investors. Even with inflation at relatively low levels right now, money kept in a bank account loses purchasing power at current interest rates. You have to invest in longer-term bonds in order to match or exceed inflation, and that comes with risks of its own, including interest rate risk and default risk in some cases.

Bank vault.

Image source: Getty Images.

That's why most asset allocation strategies need stocks. Even if you're already retired, the prospect for a retirement that could last 30 years or more means that most people need their portfolios to keep growing. Maintaining purchasing power isn't enough, and stocks and other investments with similar risk profiles are necessary in order to provide the overall growth necessary to meet your financial needs.

How to safeguard your wealth

The best asset allocation strategies will include a combination of the following assets:

  • Stocks to ensure growth, provide dividend income, and allow you to participate in the health of the overall economy.
  • Bonds to preserve capital, provide income and predictable returns, and hedge against slower economic growth in which bond investments tend to outperform.
  • Cash to meet your immediate spending needs, allowing you to keep money invested in other asset classes with a time horizon of five years or longer.
  • Real estate, either through personal holdings or through real estate investment trusts and similar publicly traded securities, in order to provide a diversified source of income that behaves differently from the rest of the stock market.
  • Assets designed for portfolio protection, which can take several forms. Insurance products, safe haven commodities like gold, and foreign currency investments are just a few of the ways that wealthy investors diversify to preserve their assets.

Not every asset allocation strategy will include all of these elements, and the proportions in which you own them will differ from person to person. However, you can use the following guidelines as a starting point for your situation, understanding that you'll need enough cash to see you through your immediate expense needs.

More than 10 years out from retirement

If you have 10 years or more to invest before reaching retirement or whatever other financial goal you're pursuing, then investing heavily in stocks makes sense. A portfolio of 85% stocks, 10% alternative investments, and 5% bonds will serve to maximize your growth prospects.

Less than 10 years out from retirement

Within 10 years of retirement, you should get more conservative. A portfolio of 67% stocks, 8% alternatives, and 25% bonds has a better balance that can weather stock market storms more effectively.

After retiring

Once you've retired, you'll want to be even more careful. However, keeping 55% of your money in stocks, 5% in alternatives, and 40% in bonds will provide you with the growth you need and the protection you want.

Be smart with your money

Finally, bear in mind that you'll want to tailor these asset allocation strategies for your own particular needs. If you haven't saved as much as you should, then a more aggressive approach might increase the odds of your having enough to meet your needs comfortable. If you have more than enough saved, then you can ease up on the aggression and emphasize security to a greater extent.

Asset allocation strategies are useful in helping you match your risk to your financial goals. You can't reach those goals without taking on some risk, but by setting up your asset allocation to control that risk, you'll be able to invest more confidently and with a greater probability of eventual success.

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