One Size Fits None
I’m often asked what the right percentage allocation is for different investments: how much should I have in stocks, bonds, large-caps, small-caps, international stocks, crypto assets, precious metals, you name it. The answer is always the same and likely frustrating to hear—it depends. But let’s talk about what it depends on and how the thinking around some stocks (spoiler alert: big tech) have changed over time.
There are three main objectives any investor should consider when allocating their portfolio: preservation, income, and growth. The importance of each of these objectives will vary by individual and will vary over time for that same individual. For example, if you’re in your 20s or 30s and saving for a goal that’s far off into the future (such as retirement), the growth objective takes center stage while income and preservation are less of a priority.
That said, risk is just as important of an input as return (the “growth” objective) when determining your investment mix. Instead of thinking about how much to allocate to each investment based on its return potential, consider thinking about your investment portfolio as a risk budget.
We all measure risk differently, so there is no prescriptive answer to how big your risk budget should be or how you should spend it. But the way you spend your budget should align with your overall risk tolerance (conservative, moderate, or aggressive) and the return expectations are then a result of that equation—not the driving factor. In other words, start the process with risk, and the end will show you the potential return.
Approaching your asset allocation this way can help prevent over-concentration and keep your return expectations realistic. It also helps keep your ultimate investment goals as the focus, rather than the desire to “beat” the market or some other benchmark over a short period of time.
One topic worth covering here is the way investors seem to view “defensive” stocks today, as it may affect the allocation in your risk budget. Traditionally, sectors like consumer staples and utilities were viewed as the less volatile, more defensive areas of the market as compared to sectors like technology.
That’s still true, but some of the stocks we consider “big tech” have behaved differently for a number of years. Since June 2012, an equal-weighted basket of the FAAMG stocks (Facebook, Apple, Amazon, Microsoft and Google) has actually outperformed the S&P 500 in more down months than consumer staples!
As our economy became more reliant on technology, investors started to look at the mega-cap tech stocks differently. They’re viewed as more resilient, more durable, and less susceptible to competitive threats than they were in the early 2000s. Thus, they became “staples” of many investment allocations and are often considered long-term holdings instead of short-term trades.
Leave Room for Change
No risk, no reward. That statement still rings true. And I stand by the idea that investors should think of portfolio allocation with a risk budget mentality. Just be sure to allow for the components of that risk budget to evolve over time in order to capture the evolution of our economy.
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Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.