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Published on: 04/19/2023 • 6 min read

How To Talk to Your Advisor About Asset Allocation Strategies

Before you talk to your financial advisor about asset allocation strategies, the best thing you can do is to understand as much as you can about the basics of asset allocation and how those principles relate to your goals. 

In addition to this, it’s important to have clear, defined parameters for your own financial goals. Advisors have spent countless hours theorizing about the different ways to get the most out of asset allocation, creating complex systems and principles to help people protect their wealth and achieve their financial goals — all of which will mean nothing if you can’t realistically answer questions about your investment goals, risk tolerance, and time horizon. 

The asset allocation professionals from Avidian Wealth Solutions, a high-net-worth investment management firm based in Houston and Austin, Texas, are here to give you the rundown on the basics of asset allocation strategies, to better prepare you for the big discussion with your financial advisor. 

The basics of asset allocation

Asset allocation is the process of distributing your investment portfolio across different categories of assets like stocks, bonds, or cash equivalents. While the principle of not keeping all of your eggs in one basket is simple, the complexities introduced by the pros and cons of the assets themselves, as well as how they fit into your personal financial plan, can mount fairly quickly.  

Your investment goals

The best way to start a conversation about how you should allocate your assets is to outline your investment goals. Make sure that your financial advisor has a good understanding of what you want to achieve with your portfolio, whether that be saving for retirement, buying a new home, or growing generational wealth on a longer timeline. Your advisor cannot draft a strategy unless they know what winning looks like to you. 

Unfortunately, many investment management firms use a one-size-fits-all approach to wealth management. If you want to succeed, you need to make sure that your financial advisor is prepared to create a plan tailored to your portfolio and your goals before moving ahead. We should know. At Avidian Wealth Solutions, nothing is one-size-fits-all. We deliver tailor-made financial strategies designed to help take you where you want to go. 

Time horizon

Your time horizon is how long you expect to invest in order to achieve whatever financial goals you have already outlined. Sometimes there are hard deadlines on investments due to children growing up, retirement approaching, or businesses closing. Other times, your goals may be based on future goals, like buying a vacation home, with no specific timeline or parameter outside of when it makes fiscal sense. Your time horizon will determine how long you can wait out periods of slow economic activity and will help inform your risk tolerance. 

Risk tolerance

How much of your original investment is capital that you are unwilling to risk? Aggressive investors often seek higher potential returns by risking a higher percentage of their initial investment. On a longer continuum, investors can generally take on more risk, if you have a hard time horizon, you’ll likely need to prioritize the protection of your initial investment, and therefore invest conservatively.

While reducing risk in wealth management is one of the most essential services a financial advisor can provide, all forms of investment inherently carry some risk, and you’ll need to decide your tolerance before entering the fold or rebalancing your portfolio. 

Three types of asset allocation strategies

What are the three asset allocation strategies? There are three broad schools of thought when it comes to allocation strategies. 

Strategic asset allocation models

The most defining attribute of strategic asset allocation models is that once the ratio of assets being allocated is set (although usually within a range) your fund manager will manage your portfolio with the intention of keeping it at that pre-set balance. 

What is an example of strategic asset allocation? Imagine your asset allocation is 70% equity and 30% debt when the market takes a dip forcing your equity down and your debt up, your financial manager would then buy stocks and sell bonds until your asset allocation re-levels at the 70% and 30% marks. 

Strategic asset allocation models are conservative, long-term strategies, that do not attempt to time the market for higher realized gains. These models can introduce structure and discipline that sets us a portfolio for low-risk, long-term growth. 

Tactical asset allocation models

If strategic asset allocation seems too inflexible you might be interested in tactical asset allocation instead. Market conditions often create opportunities, and many investors want to be poised to take advantage of those opportunities.

Like strategic asset allocation, tactical allocation involves setting a ratio for your portfolio’s assets that best aligns you with achieving your goals. The major difference between the two is that tactical asset allocation allows for temporary increases in allocation to capitalize on market opportunities. 

Because this strategy attempts to time the market, you should only be exploring it with experienced financial professionals in your corner. You need someone who will be realistic about when a window of opportunity has closed, or when the risk involved with reallocation will not be worth the reward. 

Dynamic asset allocation models

Within the dynamic allocation model, you adjust your asset allocation ratio continuously as needed based on the conditions of the market. While the central conceit of dynamic asset allocation is relatively simple, that of buying low and selling high, executing it in a regularly unstable market is anything but. 

Dynamic asset allocation models can be counter-cyclical, in which funds increase equity allocation when equity valuations decline (buying low), or pro-cyclical, in which funds increase their equity allocation in rising markets — there are many other theoretical dynamic models that can either be a success or a disaster, depending on the market and your financial goals. 

What is specialty asset management?

There are of course assets outside of your usual stocks and bonds that may be worth investing in. High-net-worth families looking to further diversify their portfolios by purchasing unique illiquid assets might want to consider specialty asset management.

Specialty assets can often withstand market volatility, making them a great untapped source for extra long-term balance and diversification in a portfolio. Some specialized assets that the fiduciary investment managers at Avidian Wealth Solutions work with include:

  • Mineral, oil, and gas assets
  • Real estate
  • Private business
  • Farm, ranch, and timberland

Specialty assets can be useful to incorporate into your asset allocation strategy — if you’ve got a financial advisor who knows your portfolio well enough to do so. 

Speak about asset allocation strategies with a fiduciary financial advisor at Avidian Wealth Solutions

Before you talk to your advisor about which asset allocation strategies might be right for you, you should know your goals, time horizon, and risk tolerance, as well as be able to understand the differences between strategic, tactical, and dynamic asset allocation models. 

Avidian offers their clients a boutique family office environment, meaning all facets of your wealth will be managed under one roof, by the same team of multidisciplinary professionals. 

If you’re looking for high-net-worth financial planning in Houston or Austin, call Avidian Wealth Solutions today, or schedule a consultation with us online, to discuss how we make wealth manageable. 

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