THE INVESTMENT STRATEGY YOU NEED NOW

Use our guide to find the best portfolio mix for you

- NELLIE S. HUANG

MAKE A PLAN AND STICK WITH it. That’s one piece of investing advice that gurus of all sorts—no matter how they approach the market—agree on. What they’re talking about is having an asset allocation plan, which divvies up your money into stocks, bonds, cash and other assets in appropriate proportions according to your goals, how long you plan to invest and your tolerance for risk. The advice is sound. By spreading your money among different kinds of assets—diversifying your investments, essentially—you lower the chance that you’ll lose money because, theoretically, they won’t move in lockstep.

But asset allocation strategies were seriously tested in 2022, when stocks and bonds fell in tandem. Diversification goes out the window during such market crashes, “just when investors need it the most,” says Sebastien Page, chief investment officer at T. Rowe Price and author of Beyond Diversification: What Every Investor Needs to Know About Asset Allocation.

Even so, asset allocation matters. One old Wall Street saw says it drives 90% of portfolio returns. But in fact, asset allocation affects portfolio volatility more than returns. “You engage in asset allocation because, like ballast in a boat, you want to minimize the sway of the portfolio,” says Sam Stovall, chief investment strategist at investment research firm CFRA Research. More important, “because you’re smoothing out the fluctuations, your emotions are less likely to become your portfolio’s worst enemy,” he says.