How Financial Asset Management May Help Investors Stay the Course

How Financial Asset Management May Help Investors Stay the Course

Doug Flynn | Mar 16, 2021

Understanding the Elements of Financial Asset Management

Financial asset management encompasses several concepts, including diversification, asset allocation, portfolio rebalancing, and the decisions that go into choosing and evaluating the performance of your investments.[iii] Let’s explore each of these individually:

Diversification. You have likely heard the adage “don’t put all of your eggs in one basket.” The idea of diversifying your investment portfolio, which is a central tenet to financial asset management, is based on the idea of spreading risk by putting your investment dollars into multiple baskets. There is no one-size-fits-all strategy for how to diversify your portfolio. For one investor, a well-diversified portfolio may include just a handful of investments. For another, a portfolio with dozens of securities may be best.[iv] There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Asset Allocation. While diversification refers to investing in more than one security, asset allocation is a deliberate approach to diversifying, investing a certain percentage of your overall portfolio into a number of different categories or asset classes, such as equity (stocks), fixed income (bonds), cash or cash equivalents, real estate, and more. Asset classes are often further broken down by type, such as international equity, small-, mid-, and large-cap equity, etc. The right mix of asset classes, and the percentage of your portfolio invested in each, should be based on several factors including your time horizon, risk tolerance, investment experience, and ultimate goals.[v] Asset allocation does not ensure a profit or protect against a loss.
Rebalancing. Implementing an asset allocation plan tailored for you is not something you can do once and then forget about. Over time, the performance of the assets in your portfolio can cause your asset allocation to drift, so that one asset class may have a higher percentage than planned, while another makes up a lower overall percentage.[vi] When you work with a financial professional to manage your financial assets, you may benefit from periodic portfolio rebalancing, designed to bring your investments back into alignment with your goals and circumstances. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Evaluating Performance. Finally, financial asset management also involves monitoring investments and evaluating their performance against market indices or other benchmarks. Financial professionals use various tools and systems designed to look at yield, rate of return, transaction fees, and more, to help identify potential opportunities.[vii] This goes hand-in-hand with diversification, asset allocation, and periodic portfolio rebalancing.

Of course, nobody can predict with certainty what any particular investment product will do in the future. But, approaching financial asset management with a plan, and seeking guidance from your financial professional, may help ensure your investment portfolio is structured with your circumstances in mind.[viii] To learn more about financial asset management, talk to your investment professional.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

[i] https://www.investopedia.com/articles/stocks/11/calculating-risk-reward.asp

[ii] https://www.cnbc.com/2020/12/04/the-stock-markets-year-shows-why-staying-invested-pays-off-.html

[iii] https://www.nerdwallet.com/blog/investing/what-is-portfolio-management/

[iv] https://www.finra.org/investors/learn-to-invest/key-investing-concepts/diversifying-your-portfolio

[v] https://www.finra.org/investors/learn-to-invest/key-investing-concepts/asset-allocation

[vi] https://www.finra.org/investors/learn-to-invest/key-investing-concepts/rebalancing-your-portfolio

[vii] https://www.finra.org/investors/learn-to-invest/key-investing-concepts/evaluating-investment-performance

[viii] https://money.usnews.com/investing/articles/should-i-get-a-financial-advisor