What is Asset Allocation & Why Is It Important to Your Portfolio?

Senior investment strategist Marci McGregor explains how asset allocation can help you find the right mix of stocks, bonds and cash to match your risk tolerance especially when the markets get volatile.

Market Decode:

Balancing Risk and Reward with

Asset Allocation

With

Marci McGregor

Senior Investment Strategist, Chief Investment Office

Merri and Bank of America Private Bank

5TPlease see important information at the end of this program. Filmed on 11/15/18.

Marci McGregor

Senior Investment Strategist, Chief Investment Office Merrill and

Bank of America Private Bank

Asset allocation – An easily forgettable term that defines one of the most important aspects of investing.

Here’s why it’s worth remembering.

At its most basic level, asset allocation is about those pie charts we’ve all seen, showing how you might divvy up your investments into different slices of stocks, bonds and cash.

Seems simple enough. The key is to divide them up in a way that’s most appropriate for you.

Just like we’re all individuals when it comes to the sports we like, the shows we watch, or even our favorite kind of pie, it’s the same with our comfort with risk, and how much excitement we want, or can stand, when the market zooms up and down.

We also have our own reasons for why we’re investing. That can include different financial goals, like saving for a car, college, or retirement.

And these goals can have their own time frame, or time horizon, for reaching them.

We also have our own “liquidity” needs; meaning we might need access to funds for say, an unexpected expense.

So how does it work?

In a nutshell, your asset allocation is the sum of your choices about how your portfolio is divided into different types of investments, like stocks, bonds and cash.

Since each of these assets, in general, has a different level of risk associated with it, the amount of each that you own should be tied with your comfort level with market volatility, which can cause sharp swings in the value of your portfolio.

Cash, which could include CDs and money market funds, is usually thought of as the least risky asset.

Bonds can have varying degrees of risk.

For example, Treasury and investment grade bonds are considered safe, while lower quality bonds, less so.

Stocks, in general, are considered the riskiest, and can range from “blue chip” companies to lower quality ones.

So if safety and stability are important to you, you might consider having more cash and high-quality bonds in your portfolio.

The tradeoff, of course, is that while cash and many bonds can be fairly stable, they don’t always generate a lot of growth.

On the other hand, if you’re okay with taking more risk, and perhaps have a longer time horizon to invest, you might consider a larger allocation to stocks, which have historically offered the greatest potential for long-term growth.

The tradeoff here is that stocks are more prone to sharp price swings, especially in the short term.

Keep in mind, this is not a set-it-and-forget-it thing. Changes in the markets can cause your asset allocation to drift over time.

For instance, if the stock market has been doing really well for a while, it could leave your portfolio too heavily weighted in stocks and expose you to more risk than you intended.

At these times, you want to consider rebalancing your portfolio so it reflects your current preferences for stocks, bonds and cash.

The same principle applies when stock prices are falling; and you might have a larger slice of bonds than intended.

Major events, like marriage, kids and retirement, could also call for a change in your allocation too.

Finally, there’s so much about investing that we cannot control, like inflation, interest rates, and volatility.

But having an asset allocation strategy is one thing we can control. Given how important it is to pursing your goals, it’s worth keeping it top-of-mind.

IMPORTANT INFORMATION

Investing involves risk including possible loss of principal. Asset allocation, rebalancing and diversification do not ensure a profit or protect against loss in declining markets. Past performance is no guarantee of future results. The views and opinions expressed are those of the speaker and are subject to change without notice at any time, and may differ from views expressed by Merrill or other divisions of Bank of America Corporation. These discussions are provided for informational purposes only and should not be used or construed as a recommendation of any service, security or sector.

The investments or strategies presented do not take into account the investment objectives or financial needs of particular investors. It is important that you consider this information in the context of your personal risk tolerance and investment goals. Due to the time-sensitive nature of the content and because investment opinions may have changed since the time any comments were made by research analysts, the latest Merrill investment opinion and investment risk rating for any particular security discussed should be reviewed, including important disclosures, before making an investment decision.

The information presented here is not intended to be either a specific offer to sell or provide, or a specific recommendation to buy any particular product or service.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. The investments discussed have varying degrees of risk. Some of the risks involved with equities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. All sector and asset allocation recommendations must be considered by each individual investor to determine if the sector is suitable for their own portfolio based upon their own goals, time horizon, and risk tolerances.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Investments in high-yield bonds (sometimes referred to as “junk bonds”) offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a junk bond issuer’s ability to make principal and interest payments.

Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal alternative minimum tax (AMT).

Investments focused in a certain industry may pose additional risks due to lack of diversification, industry volatility, economic turmoil, susceptibility to economic, political or regulatory risks, and other sector concentration risks.

The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for Global Wealth & Investment Management (“GWIM”) clients, is part of the Investment Solutions Group (“ISG”) of GWIM, a division of BofA Corp. Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker-dealer, Member SIPC, and a wholly-owned subsidiary of BofA Corp.

Merrill Private Wealth Management is a division of MLPF&S that offers a broad array of personalized wealth management products and services. Both brokerage and investment advisory services (including financial planning) are offered by the Private Wealth Advisors through MLPF&S. The nature and degree of advice and assistance provided, the fees charged, and client rights and Merrill’s obligations will differ among these services. Investments involve risk, including the possible loss of principal investment.

The banking, credit and trust services sold by Private Wealth Advisors are offered by licensed banks and trust companies, including Bank of America, N.A., Member FDIC, and other affiliated banks.

Investment products:

Are Not FDIC Insured
Are Not Bank Guaranteed
May Lose Value

MLPF&S is a registered broker-dealer, Member SIPC and a wholly owned subsidiary of BofA Corp.

DESPITE ITS (OFTEN) FORGETTABLE NAME, asset allocation is an essential concept to remember, because it directly ties the composition of your portfolio — that is, the amount of stocks, bonds and cash you hold — to your financial goals and aspirations. It also helps you factor in your investing time horizon, comfort with risk and liquidity needs, or funds for unexpected expenses.

A great way to illustrate how asset allocation works is the classic pie chart (see the slideshow below). This shows the relationship between how much market risk you’re comfortable with and the percentage of stocks, bonds and cash you could consider holding. A general rule of thumb: The more risk-averse you are, the more you’ll want to be invested in “safer” assets, like high-quality bonds and cash. On the other hand, if you’re more comfortable with risk — and you have a longer time horizon to invest — you could consider holding a greater percentage of stocks. They’re more prone to short-term price swings but offer potential for greater long-term growth. Our easy-to-use Identifying Your Investor Profile questionnaire can help you determine what type of investor you are.

Keep in mind, asset allocation is not a one-time “set-it-and-forget-it” process. “Changes in the markets can cause your allocation to drift over time,” points out Marci McGregor, senior investment strategist of the Chief Investment Office at Merrill and Bank of America Private Bank, in the video above. So you might consider rebalancing your portfolio on a regular basis to ensure that it reflects your current preferences for stocks, bonds and cash.

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