Download THE ASSET ALLOCATION INVESTMENT PROCESS

THE ASSET ALLOCATION
INVESTMENT PROCESS
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diversify.
A corporate trustee can ensure it is done efficiently,
objectively, and cost-effectively.
Although the stock market has historically trended
up over time, making it an attractive investment
vehicle for the long-term investor, bear markets
and corrections are a reality. An ill-timed market
dip can knock an aggressively allocated retirement portfolio off track.
The challenge, of course, is trying to determine when one cycle
will end and another will begin. Thankfully, that is not necessary
and, as it turns out, timing the market rarely works.
UNDERSTANDING ASSET ALLOCATION
The practice known as asset allocation is the most effective method
for most investors to balance a portfolio among various types
of investments and shield it against offsetting losses. As many
investors realize, the three main asset classes—stocks, bonds, and
cash alternatives—are often co-classified (in the same descending
order) as higher-risk, lower-risk, and lowest-risk investments.
Within each asset class, investment risk can be further broken down.
For instance, a large cap stock from a major corporation with a track
record of stability is usually considered a lower-risk investment
than a stock issued by a lesser-known company with a smaller
market capitalization. On the other hand, the small cap stock
generally carries the potential for higher returns.
DEVELOPING YOUR STRATEGY
After deciding that asset allocation makes sense, the primary
objective is to decide how to diversify your portfolio. For this
task, and for the ongoing maintenance it will require, your
Financial Advisor is an invaluable resource. At Wintrust Wealth
Management, we can help you develop an asset allocation strategy
that is aligned with your investment objectives and risk tolerance.
To make the process simpler, we have developed investment
strategy models that cover a wide spectrum of asset allocations
and serve as a guide to asset class breakdowns for various
investment styles. For instance, investors seeking growth and
income with a moderate risk tolerance would want approximately
half of their portfolio invested in stocks, a third in traditional
fixed income investments, and the remainder in alternative
income investments with a marginal amount in cash alternatives.
A growth-oriented, long-term investor, on the other hand, would
be almost entirely invested in stocks.
Diversification as a theoretical concept is easy to understand but
until the last 20 years has been difficult to implement. Most of us
recognize the need to diversify our investments among stocks,
bonds, and cash alternatives. But how do you determine what
percentages to allocate among them? In the 1950s a concept was
developed called “modern portfolio theory” to address this very
concept.
Two Major Tenets of Modern Portfolio Theory
1. Investors are risk averse. That means given the choice between
investments with the same general returns, they will choose
the least risky.
2. T
he more risk an investment has, the greater the return
potential should be. Because investors are risk averse, they
will not choose investments with greater risk without the
possibility of greater return.
Financial Advisors use these tenets in the development of portfolios
for investors. Our asset allocation models are indicated in the
chart below. Moving left to right, the chart shows allocation
Best
Asset Class Performance 2007-20161
Emerging
Markets
39.4%
Inv. Grade
5.2%
Emerging
Markets
78.5%
REITs
28.6%
REITs
9.2%
Emerging
Markets
18.2%
Small Cap
38.8%
REITS
31.8%
REITS
4.2%
Small Cap
21.3%
Commodities
16.2%
Cash
1.8%
High Yield
58.2%
Small Cap
26.9%
Inv. Grade
7.8%
REITs
17.6%
Large Cap
32.4%
Large Cap
13.7%
Large Cap
1.4%
High Yield
17.1%
Int’l
11.2%
High Yield
-26.2%
Int’l
31.8%
Emerging
Markets
18.9%
High Yield
5.0%
Int’l
17.3%
Int’l
22.8%
Inv. Grade
6.0%
Inv. Grade
0.6%
Large Cap
12.0%
Inv. Grade
7.0%
Small Cap
-33.8%
REITs
28.6%
Commodities
16.8%
Large Cap
2.1%
Small Cap
16.3%
High Yield
7.4%
Small Cap
4.9%
Cash
0.0%
Commodities
11.8%
High Yield
15.1%
Cash
0.1%
Large Cap
16.0%
REITs
1.9%
High Yield
2.4%
Int’l
-0.8%
Emerging
Markets
11.2%
Worst
Large Cap
5.5%
Commodities Small Cap
-35.6%
27.2%
Cash
4.8%
Large Cap
-37.0%
Large Cap
26.5%
Large Cap
15.1%
Small Cap
-4.2%
High Yield
15.8%
Cash
0.0%
Cash
0.0%
Small Cap
-4.4%
REITS
7.2%
High Yield
1.9%
REITs
-39.2%
Commodities
18.9%
Int’l
7.8%
Int’l
-12.1%
Inv. Grade
4.2%
Inv. Grade
-2.0%
Emerging
Markets
-2.2%
High Yield
-4.5%
Inv. Grade
2.7%
Small Cap
-1.6%
Int’l
-43.4%
Inv. Grade
5.9%
Cash
0.1%
Emerging
Markets
-2.6%
Int’l
-4.9%
Emerging
Markets
-14.9%
Int’l
1.0%
REITs
-17.6%
Emerging
Markets
-53.3%
Cash
0.1%
Cash
0.1%
Emerging
Markets
-18.4%
2007
2008
2009
2010
2011
Inv. Grade Commodities
6.5%
-13.3%
recommendations with higher levels of portfolio risk and
correspondingly higher levels of expected return. Investors with
similar investment objectives may have different risk tolerances,
therefore our asset allocation models provide recommendations
for investors with different degrees of risk tolerance.
WHAT KIND OF INVESTOR ARE YOU?
Using the investment planning process Envision®, our Financial
Advisors can determine which investment objective is right for you.
Conservative Income
Income investors seek maximum income given their risk tolerance
and are willing to forgo capital appreciation and growth of income.
With only moderate risk tolerance, Conservative Income investors
are willing to accept a lower level of income in exchange for lower
volatility and typically avoid higher-risk investments, such as highyield bonds and some equities.
Conservative Growth and Income
Growth and Income investors seek current income, but also look
for income and capital growth over time. Conservative Growth
and Income investors are willing to forgo a portion of current income
for potential future growth with a relatively modest degree of risk.
They are willing to accept lower potential returns in exchange for
lower risk. Equities, particularly dividend-paying securities, may make
up some percentage of the portfolio.
Commodities Commodities Commodities Commodities
-1.1%
-9.5%
-17.0%
-24.7%
2012
2013
2014
2015
Cash
0.3%
2016
Conservative Growth
Growth investors do not seek account income, and their primary
objective is capital appreciation. Conservative Growth investors
focus on maximum growth consistent with a relatively modest
degree of risk. They are willing to accept lower potential returns
in exchange for lower risk. Equities may make up a significant
percentage of the account.
Moderate Income
Income investors seek maximum income given their risk tolerance
and are willing to forgo capital appreciation and growth of income.
Moderate Income investors look to balance the risk of capital loss
with increased income potential. Higher-risk investments, such as
high-yield bonds and some equities, may make up a percentage
of the portfolio.
Moderate Growth and Income
Growth and Income investors seek current income, but also look
for income and capital growth over time. These investors are
willing to forgo a portion of current income for potential future
growth. Moderate Growth and Income investors seek to balance
the risk of capital loss with higher-potential growth and income.
High-yield bonds and equities, particularly dividend-paying
securities, may be a significant percentage of the account.
Modern Portfolio Theory’s Efficient Frontier
GROWTH
GROWTH
& INCOME
BALANCED
Potential Return
INCOME
& GROWTH
INCOME
CONSERVATIVE
INCOME
Downside Risk
EQUITY
FIXED INCOME
CASH
Moderate Growth
Growth investors do not seek account income, and their primary
objective is capital appreciation. Moderate Growth investors
attempt to balance the potential risk of capital loss with their
goal of higher growth. Equities may be the primary assets in the
account.
Long-Term Income
Income investors seek maximum income given their risk tolerance
and are willing to forgo capital appreciation and growth of income.
Long-Term Income investors look to achieve a high level of
income, are willing to risk losing a portion of investment capital,
and employ higher-risk, aggressive strategies that may offer greater
potential income. These investments, such as high-yield bonds
and some equities, may make up a significant percentage of the
account.
Long-Term Growth and Income
Growth and Income investors seek current income, but also
look for income and capital growth over time. These investors are
willing to forgo a portion of current income for future growth.
Long-Term Growth and Income investors are willing to risk the loss
of investment capital, and pursue high-risk, aggressive strategies that may offer greater potential returns. High-yield bonds and
equities, particularly dividend-paying stocks, may be the primary
assets in the account.
Long-Term Growth
Growth investors do not seek account income and their primary
objective is capital appreciation. Long-Term Growth investors look
for a significant level of growth, are willing to risk losing a portion of
investment capital, and employ higher-risk, aggressive strategies that
may offer greater potential returns. These investments, such as
equities, may make up as much as 100 percent of the account.
It is important to realize that asset allocation can shift over time due to varied performance of different asset classes.
Also, as your personal circumstances change, you may want to reconsider your investment objective and risk tolerance. To
learn more and review your current asset allocation, contact a Wintrust Wealth Management Financial Advisor today.
Our professionals can help you construct a strategy customized for your unique needs and best positioned to help you
achieve your long-term goals.
wintrustwealth.com
INVESTMENTS • TRUST • ASSET MANAGEMENT • WEALTH SERVICES
1. Source: Morningstar. REITs: Wilshire US REIT TR USD; Emerging Market Stocks: MSCI EM NR USD; International Stocks: MSCI EAFE NR USD; Small Cap Stocks: Russell 2000 TR USD; High Yield Bonds: Barclays US Corporate High Yield TR USD;
Large Cap Stocks: S&P 500 TR USD; Commodities: Bloomberg Commodity TR USD; Investment Grade Bonds: Barclays US Agg Bond TR USD; Cash Equivalents: Barclays US Treasury Bill 1-3 Mon TR USD.
Envision® is a registered service mark of Wells Fargo & Company and used under license.
Past performance is not a guarantee of future results. Diversification does not guarantee a profit or protect against loss. Return is measured by projected compound annual growth rates based on Wells Fargo Advisors 2010 Capital Market
Assumptions for the associated asset class. Downside risk is the return threshold that one would expect returns to fall below only once in 20 years. This means there is a 1-in-20 risk (5% probability) that the loss over a one-year period could
be greater than the downside risk calculation.
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although these funds seek to preserve the value of your investment at $1 per share, it is possible to
lose money by investing in these funds.
Asset allocation/diversification cannot guarantee a profit nor protect against loss in a declining market.
Equities: Equity investments refer to buying stocks of United States companies as well as companies outside of the United States. The market capitalization of U.S. companies is used to group large, medium (mid) and small companies.
The investment return to the owner of stock (shareholder) is in the form of dividends and/or capital appreciation. The market capitalization of companies is used to group large, medium (mid) and small companies. Shareholders share in
both the upside potential and the downside risk. Dividends are not guaranteed and are subject to change or elimination. The prices of small company stocks are generally more volatile than large company stocks. They often involve higher
risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions. Investing in foreign securities presents certain risks not
associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share-price volatility.
Fixed-income securities (Bonds): Bonds are promissory notes of a United States corporation or federal government entity (taxable bonds) or a state or local government entity (tax-exempt or municipal bonds). Bonds usually make a series
of interest payments followed by a return of principal at maturity. If sold prior to maturity, the price that can be obtained for a bond may be more or less than face value, depending on interest rates at the time the bond is sold and the
remaining term of the bond. Investing in fixed-income securities involves certain risks such as market risk if sold prior to maturity and credit risk, especially if investing in high-yield bonds, which have lower ratings and are subject to greater
volatility. All fixed-income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the
value of your investment. Fixed income securities include Treasuries (i.e., public obligations of the U.S. Treasury that have remaining maturities of more than one year), government-related issues (i.e., agency, sovereign, supranational and
local authority debt) and corporate bonds.
Alternative income: Distinct from traditional fixed income is the alternative income category, which includes high-yield debt, emerging markets debt and REITs. Such investments offer greater income potential but also higher levels of risk
than traditional forms of debt.
Commodities: Basic goods used in commerce that are generally interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. There are special risks
associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Buying commodities allows for a source of diversification for those sophisticated persons who wish
to add commodities to their portfolios and who are prepared to assume the risks inherent in the commodities market. Any purchase represents a transaction in a non-income-producing commodity and is highly speculative. Therefore,
commodities should not represent a significant portion of an individual’s portfolio.
Cash Alternatives: This category includes short term, liquid, interest-bearing investments having maturities of less than one year. It is usually used for temporary investment purposes pending a distribution or other transaction. Money market
accounts and Treasury bills are considered cash equivalents. Money market funds charge fees; cash returns are estimated net of typical fees.
Securities, insurance products, financial planning, and investment management services offered through Wayne Hummer Investments, LLC (Member FINRA /SIPC), founded in 1931. Trust and asset management services offered by The Chicago
Trust Company, N.A. and Great Lakes Advisors, LLC, respectively. Investment products such as stocks, bonds, and mutual funds are not insured by the FDIC or any federal government agency, not bank guaranteed or a bank deposit, and may
lose value. ©2017 Wintrust Wealth Management.
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