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Asset Allocation Strategy—In Depth

A deeper analysis of investment trends and topics across asset classes and global markets.

February 4, 2021

Tracie McMillion, CFA, Head of Global Asset Allocation Strategy

Michael Taylor, CFA, Investment Strategy Analyst

Michelle Wan, CFA, Investment Strategy Analyst

Veronica Willis, Investment Strategy Analyst

Chao Ma, PhD, CFA, FRM, Global Portfolio and Quantitative Strategist

Why asset allocation matters in uncertain times

Key Insights

  • The wide performance swings over the past several years demonstrate a key principle of asset allocation1 — that asset returns and their rankings vary from year to year — but historically, over multiple-year time periods, asset-class performance has tended to smooth out.
  • A diversified portfolio is designed to help reduce volatility over multiple-year time periods, but it also can accomplish this goal over shorter periods of significant return fluctuations, like we saw in 2020 with a sharp downturn and quick recovery.
  • Holding a concentrated portfolio of riskier assets could result in greater portfolio downturns when markets correct. Holding a diversified portfolio with the potential to mitigate downside risk could be advantageous during times of market stress. We believe investors should follow an appropriate asset allocation strategy through short-term dislocations.
  • A well-defined strategy can help investors avoid making emotionally driven financial decisions. Some common behavioral biases include: chasing past winners and losers and recency bias, or trading based on recent trends.

1 Asset allocation and diversification do not guarantee investment returns or eliminate risk of loss. They are investment methods used to help manage risk and volatility within a portfolio. There is no guarantee any asset class will perform in a similar manner in the future.