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Asset Allocation: What your Personal Financial Advisor Should be Telling You

All, Financial Services

Finances are complicated. Yet, it’s important for nearly everyone to have at least a baseline understanding of how to manage their money over their lifetime in order to feel financially secure and prepared for what’s ahead. When you want to go beyond the baseline, you bring in a financial advisor.

Financial advisors can be useful sounding boards for your financial goals and future dreams, helping you to navigate the complex investment landscape in order to make the decisions that are right for you. Asset allocation is just one facet of the type of work that a financial advisor can bring to the table to put you at an advantage.

What is asset allocation?

Asset allocation is the process of diversifying your investments in order to avoid, as they say, “putting all of your eggs into one basket”. Financial advisors take your overall goals into account, your age, your lifestyle preference, your risk tolerance, and make recommendations for how to best allocate your assets in order to help you achieve the future you’re hoping for.

The work on your end is simple – answer a financial advisor’s questions as they get to know you, then either take their recommendations or provide feedback. The financial advisor handles the rest.

What are different ways to allocate assets?

Asset allocation doesn’t just mean divvying up funds between different companies/investments. There are many factors that can be at play when a financial advisor considers your asset allocation strategy.

  • Size of company: A valuable financial advisor will counsel you to allocate assets between companies of different sizes depending on your goals. For stability, you may want to consider large organizations, while small companies can provide an in at a lower price with greater potential for returns in multiples.
  • Type of company: A financial advisor with your best interests in mind will recommend that you also diversify your investments between growth-style companies and value companies. Growth-style companies include big names such as Facebook, Apple, Netflix, etc., while value companies are tried and true organizations such as Coca-Cola, Johnson & Johnson, and Wells Fargo.
  • Sector of company: Depending on your preferences, a financial advisor may also have you consider the sectors that your investments fall into. Companies to choose from may be financial services organizations, exist in the defensive sector, or even the technology sector.
  • Types of investments: Stocks aren’t the only kinds of investments available to you. In addition to that “ownership” level investment, you can take advantage of bonds at different levels of risk to further diversify your assets.

When done properly, asset allocation shields you from some risk, while ensuring that you’re benefitting from economic growth.

How does passive management differ from active management?

Asset allocation is a common practice among financial advisors, but there is another differentiator to consider: passive management vs. active management. Some financial advisors will place their clients with passive managers (i.e. index funds), which, by definition, follows a specific index.  When a financial advisor instead pairs their clients up with an active manager, the fund is actively managed by a team of portfolio managers who make active decisions on what companies to buy, sell, or hold inside of the fund(s).

When a financial advisor instead pairs their clients up with an active manager, clients can rest easy knowing that their investments are being monitored and pivoted if necessary. It’s not impossible to forecast trends and make initial decisions in a smart way, but working with an active manager ensures that when once-in-a-lifetime events occur (think: the COVID-19 pandemic), that your investments can rise to the occasion.

Key Takeaways

Not all financial advisors are created equal. While the premise of every advisor’s work is the same, a valuable financial advisor will dig deep to get to know you, your goals, and your hopes for the future. They will pair you with the right asset allocation strategy and active portfolio manager in order to ensure consistent financial success. A financial advisor worth their salt will be in consistent communication with you to ensure you understand what your investments are doing for you and to educate you on why your current strategy is in place.

Reach out to M3’s financial advisor, Nicholas Natzke, to learn more about how a client-first financial advisor can work for you and your investments.

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