We all have a few go to pieces when we have a big date or interview coming up, and want to feel incredible. You can think of your investments in the same light. I’m going to associate a few key pieces for a wardrobe with some potential staples for a portfolio. Your Tahari power suit for work is the large cap allocation in a portfolio. The Dolce and Gabbana LBD (Little Black Dress) is the similar to an international equity portion. The Sevens dark wash jeans is a multiple bond strategy allotment, just as a comfy and casual t-shirt is the short term bond portion of a wardrobe. Now stick with me, I will explain how they all relate to each other, and how they might fit in your investment accounts and wardrobe.
Your power suit, you might have spent more than your first paycheck on, gives you an opportunity to move up in work. You feel polished and professional in it, and you are ready to tackle that interview or your pestering boss. You can’t grow your career without one or two of these pieces in your closet. Just like your power suit, you may need an investment that will potentially grow your account over the long term. The large cap allocation of your portfolio can be used the same way. There will be ups and downs in your career just like there is with any stock. However, large cap stocks tend to be more stable than other stocks like small or mid cap stocks, which can be the newer companies and start-ups. Large cap stocks are the J&Js, Walt Disney’s, Amazons of the equity world, and have a long track record of more stable long-term growth. Think of a large cap stock portion as a long term investment like your power suit, it is typically there for the long run.
How about your little black dress? The one that makes you feel good no matter how bloated you are. This is the international stock allocation in a portfolio. In order to make sure not all your eggs are in one basket, you need to diversify your investments. One way of doing this is diversifying your equity exposure to countries outside of the United States. So we all need our LBD just like we may need some equity in the overseas markets. Now there are two different sectors in the international space, developed vs undeveloped countries. Think of these two types as the tight in all the right places and hides your trouble areas versus the bondage dress you can only wear on your skinny days. Developed countries such as the United Kingdom and Canada are more stable than the undeveloped or emerging market countries such as countries in Latin America. This is because emerging markets tend to have less political stability, poor business structures, unstable currencies, and an infrastructure on the mend or in need of improvement. They have a higher growth potential than developed countries, but with that comes more volatility and higher risk. So when I refer to the LBD in a portfolio, I am talking about a developed international equity sector.
Now your go to pair of dark wash jeans is like your multiple bond strategy portion. It can be the anchor of a portfolio like a great pair of jeans is in your wardrobe. The multiple bond strategy allotment invests in different types of bonds, both corporate bonds and government bonds, with different maturities, so it helps diversify within the bond universe. It might not be something fancy, but it is a good way to help diversify your portfolio and keep your account from moving directly in line with the equity markets. The bonds will pay out the interest, and there can be some appreciation along the way. You won’t get the same growth potential as an equity investment, but you also may not see as much volatility or market swings to the upside and downside.
To round out our wardrobe is your classic t-shirt. You can dress is up or dress it down, and it is as flattering a cut, as a t-shirt can be. But let's be honest we wear it to hide some of our lumps under its looseness. Just like the go to t shirt, investors typically need to allocate some money to the short term bond space. It may not be exciting, but it is a great go to if you need to withdrawal money. If you need some money from your investments, you don't want to withdrawal from something that is constantly moving up and down. You want to withdrawal from something stable like a CD or short term bond. If you withdrawal from an investment that is going down, it causes an even bigger drain on your investment. Money markets, CDs, and short term bonds may not yield much, but you should consider having a portion of your money in them to balance out your portfolio. Always consider fees and surrender charges before you withdrawal from your investments.
A well rounded closet is a well-diversified portfolio. It helps comfort you when you think you have nothing to wear or when the market is going down. The bonds can help stabilize your investments, and your go to jeans will always be there as a back-up. Asset allocating to different equity assets and different bonds is a way to diversify your portfolio so you don’t have all your eggs in one basket or all your t shirts in one color.
Jessica Weaver, CFP®, CDFA™, CFS®
Any opinions are those of Jessica Weaver and not necessarily those of RJFS or Raymond James. Diversification and asset allocation do not ensure a profit or protect against a loss. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. Past performance may not be indicative of future results. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise. Please note that international investing involves special risks, including currency fluctuations, different accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets.
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