Asset allocation and diversification for long-term investing

Key Points

  • Asset allocation and diversification are time-tested investment strategies that can help you achieve your financial goals.
  • Both are important considerations to helping you enhance return potential and mitigate risks over the long term, across periods of market movement and all phases of the economic cycle.
  • Work with your advisor to build asset allocation and diversification strategies tailored to your financial goals, time horizon and risk tolerance.

To help preserve the value of your portfolio and enhance its growth potential over time, it’s important to stick with a personalized investment strategy through economic cycles as well as periods of market ups and downs. Two proven investment strategies can help you stay on track: asset allocation and diversification.

As we approach the later stages of the U.S. economic cycle, we expect market movement may become more the norm in 2019 and well into 2020, making it all the more critical to stay the course with your investment strategy.

Ameriprise perspectives

Asset allocation

Asset allocation is a process through which you and your advisor select a mix of investments that are appropriate for your financial goals, risk tolerance, time horizon and tax situation. It can help you generate returns for a given level of risk and preserve capital — regardless of market conditions — by spreading investments in your portfolio across asset classes such as stocks (equities), bonds (fixed income), alternative investments and cash.

This is important for the long term because, as the chart below shows, a single asset type that grows (or outperforms) one year could drop (underperform) the following year. For example:

  • Emerging market stocks delivered a +37.28% return in 2017.
  • In 2018, emerging market stocks fell to -14.58%.

Performance in this chart assumes reinvestment of all income and does not reflect sales charges, fees or expenses. This chart is for illustrative purposes only and representative only of unmanaged indexes that are unavailable for direct investment.

In addition, asset allocation can help you mitigate risk, given investments that offer higher potential returns tend to be riskier than investments that typically deliver more moderate returns.

To stay aligned to your asset allocation approach over time, it’s also important to regularly rebalance your investment portfolio with your advisor. For example, if the stocks in your portfolio have increased in value, you may wish to sell some and use the gains to purchase more bonds.

Diversification

Diversification is a way to take your asset allocation mix to the next level. Diversification is about balancing your investments across asset classes and within asset classes. A well-diversified portfolio can help you:

  1. Capture attractive gains from outperforming segments of the market. A portfolio of investments across a variety of asset classes, industry sectors, regions, management methodologies, risk profiles and goals may help you preserve and grow your assets over time. This is because having exposure to a wider array of investments can enable you to benefit from outperforming segments of the market over time.
  2. Reduce portfolio volatility. Diversification can help moderate short-term spikes and dips in your portfolio’s value, creating a more balanced or consistent long-term performance path. If one of your investments loses value, gains from another investment in a different sector can help offset the loss.
  3. Mitigate downside losses. Since money is distributed across asset classes and investment types that typically perform independently of each other, a drop in the value of any single asset can do less harm to your portfolio’s total value. When losses are limited, your portfolio may be able to bounce back more quickly from downturns. 
  4. Make objective decisions. As you watch your portfolio’s progress over time, keeping market ups and downs in perspective can be easier said than done. Your advisor can help you determine when action is needed, based on your diversified, goal-based investment strategy.

Talk with your advisor about asset allocation and diversification

  • Do you have a personalized mix of investments?
  • Are your investments diversified effectively so they align to your specific financial goals?
  • What asset classes make the most sense for your goals?
  • Are you comfortable with the amount of risk in your portfolio?

Your Ameriprise advisor can help you answer these questions and provide personalized recommendations for a long-term investment strategy based on your financial goals, risk tolerance and time horizon.