Strategic Asset Allocation

Long‑term investment performance is, in large part, primarily a function of asset class mix.

Historically while interest‑generating investments, such as bonds, have the advantage of relative stability of principal value, they provide little opportunity for real, long‑term capital growth due to their susceptibility to inflation.

On the other hand, equity investments, such as common stocks, have a significantly higher expected return but with the disadvantage of much greater year‑by‑year variability of return. From an investment decision‑making point of view, this year‑by‑year volatility may be worth accepting depending on the client's long time horizon.

The objective of asset allocation is to blend different asset classes together in a way that balances the risks and rewards present in each asset class.

A Smoother Ride to Retirement     

Asset allocation strategies used by Cygnet to help manage client portfolios are based upon the Nobel-prize-winning concept of Modern Portfolio Theory (“MPT”) and are designed to efficiently and effectively manage investment volatility (“risk”).

Strategic asset allocation manages volatility by recognizing the mathematical relationship between different asset classes. Intelligent diversification uses the gains experienced in one asset class to help offset the losses or declines in another. The result is a properly diversified portfolio and systematic approach to investing which outweighs the potential benefits of security selection and market timing.

The advantage of strategic asset allocation was initially documented in a 1991 study[1] which concluded that 91.5% of the return variability in a portfolio over time could be explained by the portfolio's asset allocation policy, while market timing, security selection and other factors only accounted for 8.5%. These conclusions were reaffirmed by a study conducted by Vanguard and published in July 2012[2].



[1] Brinson, G.P., Singer, B.D. and Beebower, G.L., “Determinants of Portfolio Performance, II: An Update”, Financial Analysts Journal May-June 1991

[2] Wallick, D., Shanahan, C., Tasopoulos, C., Yoon, J., “The Global Case for Strategic Asset Allocation”, Vanguard Research, July 2012

 

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Cygnet Financial Freedom House is an independent Registered Investment Advisor (RIA) with the States of Michigan and Pennsylvania. Cygnet utilizes TD Ameritrade as an independent and unaffiliated custodian for client accounts. Securities offered through Triad Advisors, Inc., Member FINRA/SIPC.