Long-term asset allocation should be designed so that an investor's capital is protected but also so that the overall value of a portfolio grows. To accomplish this, asset allocation should allow for some risk, which can lead to higher returns. There should also be exposure to relatively safe investments that aren't likely to generate the most profits but are not likely to cause losses. Investing in asset classes that traditionally respond differently to the same economic conditions can also provide diversification in asset allocation.
Diversification can help an investor to reach long-term goals. One way to ensure proper diversification is to spread assets across investment categories. It's likely that the best asset allocation will change through different market cycles, but as long as a portfolio remains aligned with targets an investor is more likely to achieve long-term goals.
Exposure to stocks adds volatility to an investment portfolio. An investor in the markets for the long haul should expect some near-term price swings, some of which can be severe. The stock market has also delivered better returns than any other investment category over the long term, according to the AXA Equitable website. The precise allocations to each asset class should be based on an investor's goals and ability to handle risk. In 2011, the California Public Employees' Retirement System, which invests for the long-term, allocated nearly half of its portfolio to equities.
Investors can shelter an investment portfolio from rising inflation by including exposure to Treasury Inflation Protected Securities in a long-term portfolio. TIPS fall under the fixed-income investment category. They are stable investments that are backed by the U.S. government. Returns from safe Treasuries are conservative but investors can also include an allocation to riskier debt, such as mortgage securities and high-yield bonds, for greater returns, according to the Portfolio Solutions website.
A benefit to commodity investing is that the asset class provides ample diversification to a portfolio. Trading performance in commodities, such as oil and precious metals, traditionally remains separate from the direction in the stock market. Investors can appreciate this when the stock market is under pressure and bonds are slow earners but commodities continue generating profits. Investors can gain access to pure commodities, not just commodity companies, by investing in commodity exchange-traded funds. Commodity ETF returns are not correlated to the stock market, according to a 2008 article on the SmartMoney website.
- SmartMoney Magazine; Uncorrelated Commodity ETFs Offer Downside Cushion; Rob Wherry; February 2008
- California Public Employees' Retirement System: Statement of Investment Policy for Asset Allocation Strategy; July 2011
- AXA Equitable: Asset Allocation: A Strategy for Investment Success
- Portfolio Solutions: Asset Allocation Decisions
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