Asset allocation: A beginner’s guide
Fourth in a four-part series on long-term investing Tightrope walkers know that getting onto a platform should be easy — it’s balancing that requires a little extra effort.
It’s a good analogy for online investing. Once investors have committed to an online trading platform, they’ll have to devote some attention to asset allocation, and keeping their portfolio in balance.
However, there’s no standard answer to what constitutes a wellbalanced investment portfolio. Asset allocation is something that must be customized to each individual investor, says Jeff Beck, associate vice- president, strategy and marketing, at TD Direct Investing.
“The three general asset classes that make up a portfolio are fixed income, equities such as stocks and ETFs (exchange-traded funds), and cash,” he says. “How those assets are allocated in a portfolio depends on the goals, risk tolerance and investment time horizon of each individual investor. On our online platform, we try to help investors achieve their goals by making it easy to invest and monitor their performance, and by educating them on how to make informed decisions that best support their goals.”
Most investors have an intuitive notion of their own tolerance for risk. While there are plenty of online questionnaires designed to help people determine what type of investor they are, these should be treated as more fun than factual.
“I wouldn’t expect someone to make their investment decisions based on the results of an online quiz,” he says. “The questions you need to ask yourself are not difficult. People should determine how much risk they’re comfortable taking on, how long their investment time horizon is and what their investing goals are. By thinking about their answers, they should be in a position to start formulating the composition of their portfolio allocation to meet their personal investment objectives.”
TD Direct Investing offers a series of online videos, webinars and master classes where attendees can interact with live instructors, which can also help investors learn how to make the allocation decisions that are right for them.
“We also provide analyst research, ratings and opinions associated with various stocks,” says Beck. “Those include third-party and proprietary TD Analyst reports. By using a combination of research and the tools and information we provide, you can take a lot of the emotion and guesswork out of investing decisions, and be in a position to make smarter, more informed choices.”
Using TD’s online platform to call up stock quotes will also deliver information on that stock’s beta — a measurement of the stock’s relative volatility, or risk, as compared to the market as a whole.
While some investors favour a “buy and hold” strategy that mitigates short- term fluctuations by taking a long- term view, others seek ways to optimize their portfolios and outperform the market by buying and selling more frequently. While one style of investing isn’t inherently superior to the other, both types of investors should monitor their portfolios to ensure that their investment choices continue to align with their goals.
“How often i nvestors should examine and rebalance their portfolios is a topic of some debate,” says Beck.
“However, it’s prudent to monitor your investment portfolio on an ongoing basis to make sure it stays in balance and on track to attaining your goals.”
TD Direct Investing’s flagship trading platform, WebBroker, can make that job easier for investors by providing a suite of almost 50 different alert settings that help you monitor the individual stocks in a portfolio.
“If you like this approach, you can receive automatic notifications about the different positions you hold or are interested in,” says Beck. “We’ll automatically push that information out to you on your phone — for example, a specific increase or decrease in the market price, earnings and dividend announcements — and if those alerts lead you to believe that your asset allocation has become unbalanced, you’ll be able to make the necessary adjustments by trading right on your phone.”
He also notes that a portfolio that is currently performing well isn’t necessarily well-balanced.
“If you’re more speculative and you get a big payoff, you’re profiting, but your portfolio may become out of balance,” say Beck. “If your fixedincome securities are not performing well today, you may not be in a position that supports your long- term growth objectives.”
Ultimately, Beck likes the “sleep test” for ensuring that a portfolio balances an individual investor’s appetite for risk versus reward.
“If you can sleep at night without worrying about your investment decisions, your portfolio is likely in sync with your investing style,” he says. “Researching your decisions before investing helps contribute to a good night’s sleep.”
Visit the Managing Wealth channel online at FinancialPost. com for more insights into long- term investing strategies.
RESEARCHING YOUR DECISIONS BEFORE INVESTING HELPS CONTRIBUTE TO A GOOD NIGHT’S SLEEP