Basics of Strategic Allocation
I’ve had several questions about the distinctions between the various portfolios in ETF Strategist.
The three “strategic” portfolios, allocated according to aggressive, moderate, and conservative risk tolerances, trade less frequently, and are designed to help investors meet specific goals.
Many investors are accustomed to playing “beat the market,” rather than evaluating the risk-and-return balance they need to meet those goals.
It may sound counterintuitive, but beating the market shouldn’t even enter into your long-term investing calculations.
The phrase “beating the market” typically means getting a return that’s better than the S&P 500 index. The problem with that is obvious, however: The broad market consists of several other asset classes besides the U.S.-based large caps tracked by the S&P 500.
The strategic portfolios hold a range of domestic and international stock-and-bond asset classes. These are the same types of portfolios I developed for my asset-management and financial planning clients. Professional investors use all the available asset classes, as these give you the flexibility to achieve the return you need while simultaneously dampening volatility.
When investing for retirement, the chief aim is not to swing for the fences and get the highest possible return, no matter the risk. Your aim is a successful outcome. In plain English, that means the ability to retire comfortably, enjoy your lifestyle without scrimping and saving, while preventing catastrophic losses in a severe market downturn.
Unfortunately, the S&P 500 has become the benchmark for U.S. investors. There are times when the S&P 500 will indeed outperform other investment categories. But in years when the S&P underperforms an allocated portfolio, you’ll be happy you diversified.