Last month’s newsletter discussed the impact inflation can have on a portfolio and retirement savings. We discussed the implications that such a small number can have on your long-term prospects of success. Inflationary factors can have an even greater impact on a portfolio in down markets, and that is why it is important to build an asset allocation that provides the diversification to weather such times. This month we take a closer look at asset allocation; how and why we blend the various asset categories.

Many financial experts believe that determining your asset allocation is the most important decision you will make with respect to your investments. It may in fact be more important than the actual individual investments you buy. With the vast array of investment products and vehicles available, finding the right mix of stocks, bonds, cash and other investments is a daunting task. Further, monitoring your portfolio composition and adjusting appropriately is imperative. Over time, the composition of your portfolio should be adjusted to respond to changes in your own life and changes in the economy around you – and in this day-and-age, even the economies that comprise the global marketplace.

While stocks and stock mutual funds historically have the greatest volatility or risk among the major asset classes, they also have historically produced the highest returns. At Dominion Wealth, when building your portfolio we diversify using uncorrelated sectors. This gives us even more control than just using a broad asset class such as large cap stocks. This means we look at different sectors of the market that move in different patterns in response to the same market or economic conditions. For instance, we would not expect the Healthcare sector to have a negative reaction to news that India’s currency has been devalued, just as India funds would not directly benefit from the prescription drug needs for an aging U.S. population. Sector diversification provides market exposure and manages the risks associated with investing by limiting your exposure to any one type of investment.

Occasionally we witness market “events” in the form of adverse news that spurs a panic and can have the effect of bringing the entire market down for a period of time. The sub-prime crisis of the past year, and the skyrocketing cost of oil and commodities are examples. Filtering through the noise and adhering to a plan is essential for navigating such turbulent times. The prices of stocks tend to be flighty and emotionally driven; reacting and responding to the news of the day and the pervasive climate of the populace. For example, emotional investors will sell their technology funds in response to sub-prime defaults despite the fact that this has no direct impact on the earnings of technology companies. The value of a sector is revealed over longer periods of time, and largely reflects the underlying strength of the companies that comprise it.

We provide guardianship for your complex portfolios. You have multiple objectives including retirement funding, risk management, tax avoidance, wealth creation/preservation and family legacy distribution. Asset allocation is one of the many factors we consider when planning for your future. Knowing how to build a portfolio is important. Knowing when to move in and out of different asset classes and sectors is essential.

Regards,