Personal Finance

Time to Check Your Asset Allocation

August 14, 2019
Your mix of stocks, bonds, and cash should reflect your goals, time horizon, risk tolerance, and personal circumstances.

Key Points

  • Market volatility may be unsettling, but taking a long-term view can help.
  • Keep in mind that U.S. stocks have provided positive returns over every rolling 20-year period since 1950.
  • Broad portfolio diversification can help mitigate the risk of overexposure to any one area of the market.

While periods of volatility are inevitable, investors may overreact during these times and undermine their long-term investment programs. Rather than succumb to knee-jerk reactions, investors should review their asset allocation strategy and try to maintain a long-term perspective.

"As long as your asset mix of stocks, bonds, and cash appropriately reflects your financial goals, time horizon, risk tolerance, and personal circumstances, sticking with your investment plan could prove rewarding over longer periods," says Judith Ward, CFP®, a senior financial planner with T. Rowe Price. "Drastically reducing equity exposure for fear of incurring further short-term losses could result in having less money to fund long-term goals."

Diversification

Portfolios also should be diversified within each asset class. So an equity portfolio might include exposure to large- and small-cap stocks, growth- and value-oriented investments, and international equities. A bond portfolio might include international, high yield, and investment-grade corporate bonds as well as government debt.

Broad diversification across sectors provides exposure to those that are leading without being derailed by those that are lagging. Of course, diversification cannot assure a profit or protect against loss in a declining market.

In bond markets, fixed income securities traditionally have provided relative stability to help offset periods of equity declines. It has been almost 50 years since both the S&P 500 Index and 10-year Treasury bonds posted negative returns in the same calendar year.

Bonds typically offer greater return potential than cash and more stability than stocks, which is important for investors with nearer-term financial goals. However, investors with longer time horizons (at least five to 10 years) should continue to emphasize equities because they have outperformed other financial assets and provided a better hedge against inflation over the long term. Those approaching retirement might consider gradually reducing their equity exposure.

Over the past 25 years through 2018, the U.S. stock market has suffered through two historic bear markets (a 49% decline in 2000–2002 and a 57% fall in 2007–2009), as well as several corrections (declines of at least 10%). Yet, the market recovered to reach new highs, showing an annualized return of 9.07% for the 25-year period ended December 31, 2018, compared with 5.09% for the Bloomberg Barclays U.S. Aggregate Bond Index. (See “Risks Versus Rewards of Asset Allocation.”)

Stock returns can vary widely from year to year, and past performance cannot guarantee future results, but U.S. stocks (as measured by the S&P 500 Index) have provided positive returns over every rolling 20-year period since 1950 through 2018. During the 63 rolling 30-year periods since 1926, the market’s worst performance was an annualized return of 8.5%.

“Stick to fundamentals and focus on what you can control.”

- Judith Ward, CFP®, Senior Financial Planner

Guidelines

During periods of market turbulence, Ward reminds investors that “what’s happening in the headlines may not be what’s happening in your accounts. Stick to fundamentals and focus on what you can control.”

  • Make sure your asset allocation is properly diversified and appropriate for your financial goals.
  • Keep contributing to your retirement and college savings accounts. Investors with longer time horizons, in particular, can take advantage of investing during down markets.
  • Rebalance on a regular basis to maintain your target portfolio diversification.
  • Don’t panic or try to time the markets.

“Regardless of the environment, investors should aim for a diversified portfolio that could provide reasonable returns over time,” Ward says. “Looking beyond the short-term swings and adhering to your strategy may be the best bet to achieving your financial goals.”

T. Rowe Price Asset Allocation Funds

You may choose to build your own portfolio of investments suited to meet your financial goals, or you may want to explore asset allocation funds, which offer a diverse portfolio through one fund. Depending on the goal for your assets, there are T. Rowe Price asset allocation funds to meet your needs.  

Call 1-800-225-5132 to request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information you should read and consider carefully before investing.

Important Information

Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. International investing, particularly in emerging markets, entails additional risks, including currency and political risks. Bloomberg Index Services Ltd. Copyright © 2019, Bloomberg Index Services Ltd. Used with permission.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2019. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

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This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of
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Next Steps:

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