Global Investment Strategy

Weekly market insights and possible impacts on investors from the Wells Fargo Investment Institute Global Investment Strategy team.

October 24, 2016

Tracie McMillion, CFA, Head of Global Asset Allocation Strategy

What Do You Want Your Money to Do for You?

  • An investment objective defines what you want your money to do for you.
  • Inputs into this decision include your need for income and growth, your risk tolerance and your time horizon.
  • Your liquidity needs, tax considerations and special circumstances are important considerations when determining what types of assets to include in your portfolio.

What it may mean for investors

  • Setting an investment objective and corresponding asset allocation can help you establish a reasonable expectation for the average return that your portfolio may achieve, and the risk it may exhibit, over a full market cycle. It also can help you stick with your plan when markets turn volatile.

Choosing the appropriate investment objective for your circumstances is a critical step toward achieving your financial goals. In our recent investor survey, we asked more than 500 investors which factor was most important to them when making investment decisions (Chart 1).

Chart 1. What Factor Is Most Important to You When Making Investment Decisions?Chart 1. What Factor Is Most Important to You When Making Investment Decisions?Source: Wells Fargo Investment Institute Investor Attitude Survey, 8/16. This chart shows results from a recent investment attitude survey conducted by TNS for Wells Fargo Investment Institute that asked a series of investment -related questions. There were 547 respondents with investable assets of $500,000 or more.

The largest percent of survey respondents (47%) chose risk tolerance as the most important factor. While risk tolerance is an essential factor, it should not be considered in isolation. Your need for income and/or growth and your time horizon also are principal considerations. Together, these factors assist in determining the asset allocation that is most likely to help you achieve your goals. Time horizon and risk tolerance can work together—in that your tolerance for risk can increase as your time horizon lengthens. That is because short-term market losses often are recovered over longer periods of time. Your investment allocation should, therefore, look very different if your time horizon is six months, six years or sixteen years.

Your investment objective defines what you want your money to do for you. Our primary investment objectives are “Income,” “Growth & Income” and “Growth.” Is your primary need or desire to have a current income stream? If so, that is what our Income objectives are designed to provide. They are expected to earn lower relative returns and experience lower corresponding volatility than our other investment objectives. They also are designed to provide higher potential yield.

Perhaps you are retired, but still have a long life expectancy. In that case, you may want both current income and some growth potential for your assets. Our Growth & Income portfolios are expected to achieve higher returns and experience greater levels of volatility than our Income portfolios.

Maybe you want growth now to provide for retirement income or a future legacy. If that is the case, then our Growth portfolios may be the best choice for you. Our Growth portfolios are designed to have the highest relative levels of expected return and risk.

Within each of our three objectives, there is room to increase your risk in hopes of generating greater returns—or to lower your risk to potentially mitigate volatility. You may have a conservative tilt to your objective or an aggressive tilt. Perhaps middle of the road, or moderate, is the right risk tolerance for you within your objective.

As such, we offer the nine investment objectives shown in Chart 2 below. We also offer these nine objectives including alternative investments which may be appropriate for many investors.

Chart 2. Investment Objectives: Wells Fargo Investment Institute
Strategic Allocation Models — Three Asset Groups: Fixed Income, Equities, and Real Assets
Chart 2. Investment Objectives: Wells Fargo Investment Institute: Strategic Allocation Models — Three Asset Groups: Fixed Income, Equities, and Real AssetsSource: Wells Fargo Investment Institute, 10/24/16. This chart is for illustrative purposes only. Chart is conceptual and does not reflect any actual returns or represent any specific asset classifications.

Several other considerations are important for your portfolio construction. Your liquidity needs help determine how much of your portfolio should be invested in assets that typically can be easily converted to cash. In most market conditions, mutual funds, exchange-traded funds (ETFs), most individual stocks, many bonds, real estate investment trusts (REITs) and commodity funds can be converted to cash within a few days. Many alternative investments, on the other hand, may not be available to most investors and may have lock-up periods of three months to ten years or more, but may offer greater potential returns or lower potential volatility in exchange for the liquidity risk. Your tax circumstances and the tax status of your account can help determine if tax-advantaged assets are appropriate holdings for your account. Any special or unique needs that you have can also determine how your portfolio should be structured. For example, if a large portion of your portfolio is invested in just one company’s stock, the rest of your portfolio may be invested to help mitigate the concentration risk of that holding.

Setting an investment objective and corresponding asset allocation can help you establish a reasonable expectation for the average return that your portfolio may achieve, and the risk it may exhibit, over a full market cycle. It also can help you stick with your plan when markets turn volatile. Your investment professional can help you select the investment objective that is right for you—or adjust your investment objective as your circumstances change.

Risk Factors

All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.

Alternative investments carry specific investor qualifications which can include high income and net-worth requirements as well as relatively high investment minimums. They are complex investment vehicles which generally have high costs and substantial risks. The high expenses often associated with these investments must be offset by trading profits and other income. They tend to be more volatile than other types of investments and present an increased risk of investment loss. There may also be a lack of transparency as to the underlying assets. Other risks may apply as well, depending on the specific investment product.

Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Real assets are subject to the risks associated with real estate, commodities and other investments and may not be suitable for all investors.

Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower rated bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Global Investment Strategy is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the Global Investment Strategy division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

This report is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Wells Fargo Advisors is registered with the U.S. Securities Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company.

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