How to Create the Best Asset Allocation for your Portfolio

The art of creating the best asset allocation for your portfolio is one that is widely covered across the internet — you’ll find no shortage of articles on the topic. But it’s a subject you can never know too much about, so as such, I’m adding my voice to the masses.

In doing so, I will also outline how we at Felton & Peel address this subject. All financial professionals will have their own unique approach, and this is why your first step on the road to finding the best asset allocation is to initially perform a rigorous search for the financial planner you believe is the perfect match for your needs.

Once you have your ideal financial guide and advocate onboard to help embolden you in your investment choices, the next step is to ensure you have a thorough awareness of the correct process they should take you through to help you achieve the best results.

How Risk Tolerance Helps Create the Best Asset Allocation

The overarching purpose of having the best asset allocation is to help minimize portfolio volatility based on your personal risk tolerance. The aim of assessing this tolerance is to ensure that, as the pundits forecast our next recession to be sometime in 2020, you are adequately prepared for such an eventuality.

Experts are predicting a recession sometime in Q4 2019 between Q2 2020. The time is now to ensure your asset allocation is right for you.

At traditional wealth management firms, discovering your risk tolerance typically begins with you sitting down with your financial planner and completing a 10–20 question risk tolerance questionnaire. This questionnaire is designed to help gauge the risk level that you are willing to tolerate within the inevitable stock market fluctuations.

From this, your asset allocation is born. You should then complete your questionnaire again on an annual basis to ensure your portfolio is still in order. Your focus should always be on working towards protecting your nest egg from another Great Recession.

The sheer market volatility and investor anxiety alone from the Great Recession should have you rethinking your strategy and making your Asset Allocation a “Living” one!

From Best Asset Allocation to a Living Asset Allocation

At Felton & Peel, we have done away with the old way of creating your best asset allocation. Instead, we have created our own unique approach called the “Living Asset Allocation.” Our financial planning clients go through a proprietary process to help determine their personalized and best asset allocation for their portfolio.

So, what is that process? Well, we focus on four key areas:

#1. Cash Flow Management

We begin by sitting down with our clients to look at both your current and future cash flow needs. We then determine if you will need to access any funds within the portfolio to help minimize both liquidity and market risk as well as trying to “time the market.”

#2. Tax Optimization

Tax optimization plays a vital role in our process. By running a comprehensive cash flow-based financial plan, we are able to look at your future cash flow needs and, with the guidance of your tax advisor, forecast your personalized potential tax impact. This is extremely important, as we would want to ensure that potential tax liabilities are covered within your liquidity needs.

#3. Managing Interest Rate Risk

Managing your interest rate risk is more important than ever. With interest rates steadily climbing back up to historical averages, the Federal Reserve is eyeing four total rate increases in 2018. Industry pundits like Jamie Dimon, CEO of JPMorgan Change & Co., are also forecasting 10-year Treasury yields as high as 5%, up from the current rate of around 3%.

It is a constant task to ensure that your lower-risk and/or fixed investments continue to maintain their purchasing power while protecting your principal investment as rates increase. Always remember this basic understanding of bonds. As bond rates increase, the price of the bond decreases (and vice versa).

Now of course this topic is not that simplistic, but for the sake of this post we want to drive home a point; which is your fixed investments need to be closely watched especially within this environment.

#4. Client Psychology

For the final ingredient, we use client psychology to explore the biases, behaviors, and perceptions that impact your decision-making and overall financial wellness. We bring all of this technical data and analysis together and mix in the natural human emotional element.

Through the process of getting to know you, along with the ongoing relationship that we either already have or are in the process of forging, we lay the foundation for us to successfully assist you during the really tough 50/50 situations.

Creating The Best Asset Allocation For Your Portfolio, Now

As you can see, gone are the days of answering a quick questionnaire. That is if you are looking to safeguard your portfolio from your emotions and market volatility. Another costly mistake that some can make is doing it themselves. When you opt for DIY investments, you are still leaving yourself vulnerable for making emotional decisions (see client psychology).

Believe it or not, financial planning is still one of the very few professions left where human interactions matters. Trust me, having that trusted professional to help you to determine how much of your life savings you should be risking within the stock market, is clutch.

If you would like to discuss your best asset allocations and investment options, then we invite you to get in touch. We’ll gladly chat with you about our unique process.

Malik S. Lee, CFP®, CAP®
Malik Lee is the Managing Principal of Felton & Peel Wealth Management. A CERTIFIED FINANCIAL PLANNER™ with more than 15 years of financial services experience, he is a Guest Lecturer at Morehouse College, serves on the CFP Board Council of Examinations, and is a Board Member for the FPA of GA.
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