Periodically reviewing your investments to ensure they are on the right track is an important and meaningful measure toward helping make your future dreams a reality.
Here is a simple but valuable way to get more from your investment strategy. When your next brokerage statement arrives, check your account profile to make sure that all the sections are accurate and up to date. This includes:
- Investment objective
- Risk tolerance
- Time horizon
- Liquidity needs
We highlight each of these below:
Focusing on your investment objectives helps us align the other parts of your investment strategy – risk tolerance, time horizon, and liquidity needs – appropriately. Investment objectives help shape our recommendations for your investment decisions – whether you are seeking income, growth and income, or growth.
Our asset allocation models are grouped within three overarching portfolio orientations:
- Income: Portfolios that emphasize current income with minimal consideration for capital appreciation. They usually have less exposure to more volatile growth assets.
- Growth and Income: Portfolios that emphasize a blend of current income and capital appreciation. They usually have some exposure to more volatile growth assets.
- Growth: Portfolios that emphasize capital appreciation with minimal consideration for current income. They usually have significant exposure to more volatile growth assets.
Everyone is different when it comes to factoring risk into their investment strategy. Each investment objective can be tilted toward assets that tend to be more or less volatile. Risk tolerance is the amount of risk you’re willing and able to accept in order to help achieve your financial goals.
Risk tolerance should be viewed along the following continuum:
- Conservative investors accept the lowest amount of risk
- Moderate investors seek a balance between stability and appreciation in their portfolio
- Aggressive investors accept a higher risk for losses while seeking greater potential for returns
How long do you plan to invest before you’ll need the money? The answer, of course, depends on your stage in life and your goals. Your time horizon is the expected number of months, years, or decades you plan to invest toward your financial goals.
Time horizon is generally expressed as:
- Immediate – Less than 1 year
- Short-term – 1 to 3 years
- Intermediate – 3 to 5 years
- Moderate – 5 to 10 years
- Long-term – More than 10 years
Consider your liquidity needs
When checking your portfolio’s alignment, it’s also a good idea to make sure you’ve accounted for your liquidity needs. Liquidity measures the ease with which you can meet financial obligations with your available liquid assets. For reference, cash is the most liquid asset, while real estate, fine art, and collectibles are all relatively illiquid.
Liquidity needs include:
- None (have other sources of cash)
- Moderate (may need quick access to cash)
- Significant (primary need is liquidity)
Map an efficient frontier into your portfolio
When building your portfolio, it can be tricky to figure out if you’re getting the best return for your risk level. An efficient frontier aims to achieve an optimal return by factoring in the assumed risks and returns of available asset types and the assumed correlations among returns.
In the hypothetical chart below, the arched line represents an efficient frontier. Knowing where you reside in relation to it allows you to:
- Increase your return potential for the level of risk by moving upward to the efficient frontier
- Decrease your risk for the level of return potential by moving to the left to the efficient frontier
Asset allocation and diversification are investment methods used to help manage risk. They do not ensure a profit or protect against market loss. All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable.