There is a lot of noise currently around what impact Donald Trump returning to the White House might have on Markets around the world. There are many views and opinions on offer, and inevitability some will be correct in their predictions – the challenge facing investors is possessing the hindsight to know which of those was correct!!

In all likelihood what we will experience is a period of volatility and nervousness in world markets, which of course no investor enjoys.

At Curve Wealth our approach is to ensure our clients have the correct asset allocation in place matching their Risk Appetite which provides them with the comfort that they are positioned for the long term and can ignore short term fluctuations in markets.

Asset allocation is one of the most important aspects of investing because it directly impacts both the risk and return profile of your portfolio. Here’s why it matters:

1. Risk Management

Different asset classes (stocks, bonds, real estate, cash, etc.) behave differently under various market conditions. By diversifying across multiple asset classes, you reduce the risk that a single investment or type of asset will significantly impact your overall portfolio. For example, when stocks are down, bonds or cash might perform better, helping to stabilize the value of your portfolio.

2. Optimizing Returns

Asset allocation allows you to balance higher-risk, higher-return assets (like stocks) with lower-risk, lower-return assets (like bonds or cash). By adjusting the weight of each asset class according to your financial goals, time horizon, and risk tolerance, you can maximize returns while managing the level of risk you’re comfortable taking on.

3. Achieving Financial Goals

Different financial goals (e.g., retirement, buying a home, funding education) require different approaches to asset allocation. If you’re saving for a long-term goal like retirement, you might take on more risk and allocate a larger portion of your portfolio to equities, which have higher potential returns over time. For shorter-term goals, you might focus more on bonds or cash to preserve capital.

4. Market Volatility

No asset class is immune to market fluctuations, and different assets tend to react differently to economic events. For instance, stocks might be volatile during economic downturns, while bonds or gold might act as safe havens. A well-diversified portfolio, with an appropriate asset allocation, can help you weather market volatility more effectively.

5. Time Horizon

Your investment time horizon (the length of time you expect to hold an investment before needing to access the money) is crucial in determining your asset allocation. A longer time horizon generally allows for more aggressive asset allocation (more equities), since you have time to ride out market fluctuations. If you’re closer to needing the funds, a more conservative allocation might be appropriate to avoid the risk of a major loss in the short term.

6. Behavioural Benefits

A proper asset allocation can help you stay disciplined during market swings. If your portfolio is diversified according to your risk tolerance and goals, you are less likely to panic and make emotional decisions, such as selling stocks in a market downturn. Asset allocation gives you a structured plan that can help you maintain focus during volatile periods.

7. Tax Efficiency

Different asset classes are taxed differently, and part of asset allocation can include thinking about how to reduce the tax burden on your portfolio. For example, investing capital into Superannuation accounts and tax-efficient investment structures can help minimize taxes over time.

Conclusion

In essence, asset allocation matters because it helps you manage risk, optimize returns, and stay on track to achieve your financial objectives. It’s not just about picking individual investments but about creating a balanced mix of assets that aligns with your risk tolerance, goals, and time horizon.