Financial markets fluctuate—but your investment philosophy shouldn’t, experts say. Instead of trying to “time the market,” the principles of allocation, diversification and discipline (ADD) can help investors grow and safeguard their investment portfolios.
Starting to save or invest as early as possible is a difference-maker, according to Liu Liu, director of investor research and management at BOK Financial®. For example, starting to save for retirement at age 28 can produce $1,000,000 by age 65—$345,000 more than starting at age 35—through $7,000 in annual contributions and 6% average annual portfolio growth.
1. Allocation
Just as people tend to enjoy a variety of activities or attractions while on vacation, spreading your investable assets around provides a portfolio with variety and depth—and may also hedge against volatility. This process of spreading your investments among multiple asset classes, rather than having all your money just in one type of investment, is known as diversification, which we’ll discuss in more depth next.
Proper asset allocation involves owning several asset class types. Cash, fixed-income and equities are the most common, but alternative investments (like hedge funds or real estate) that tend to be more speculative or less liquid can also have a place.
Asset allocation is driven by a mix of the investors’ goals, risk tolerance and/or age. Though asset allocation tools exist online, it’s usually better to receive guidance from a financial advisor or Certified Financial Planner (CFP) who better understands your personal situation, Liu suggested. “An advisor plays an important role by having properly vetted information at their fingertips and the tools to help keep an investor’s allocation on-track,” she explained.
2. Diversification
Often framed as spreading the wealth or not having all your eggs in one basket, diversification can help investors optimize returns and mitigate risk. Again, how your money should be allocated depends on your goals, risk tolerance and age—but, in every case, your portfolio should be diversified, experts noted.
Investors who need more cash on-hand or who have less risk tolerance typically opt for allocations that reflect higher percentages of cash or fixed-income instruments, as these carry more certainty and less risk. Investors with longer-range timelines, perhaps someone in their 30s saving for retirement, may have a higher equity allocation that can withstand market fluctuations over the long haul.
Here are some other rules of thumb, according to Liu:
- Cash may be placed in savings accounts or money market funds. These instruments are highly accessible and provide easy liquidity for short-term needs or big-ticket purchases.
- Fixed-income investments include bonds, Treasury bills or certificates of deposit (CDs) that have defined or insured returns, within limits, over specific periods of months or years. Given the buyer-seller tradeoff between promised returns and illiquidity, early termination may incur penalties.
- Stocks are the most common equity investment and come in many varieties. Individual stock holdings can be labeled as value, growth, dividend or blue-chip, and carry no guarantees of appreciated value.
- Stocks or bonds can also be grouped into mutual funds, index funds and exchange-traded funds (ETFs), which may be composed by industry (technology, pharmaceutical or consumer products, for example) or a broader cross section of the markets, like the S&P 500 or Nasdaq indices.
Liu, an 18-year company veteran, and her team research and approve external investment managers for BOK Financial. They also serve as gatekeepers, supporting internal advisors who help private wealth, institutional and retail brokerage clients. “Our work is grounded in the idea that allocations and diversification are what drives investment outcomes,” she said.
3. Discipline
Another hallmark of successful investing is the discipline to have a plan and stick with it, even as times change. This can mean:
- Not selling in panic mode when values decline, but instead waiting for a rebound. For example: An S&P 500 owner who sold in March 2020 had a 13% loss from December 2019, but would have gained more than 16% by January 2021.
- Investing as values decline, accumulating more of the holding. This reduces the average cost per share or unit and can yield more participation in a future upswing.
- Harvesting a tax loss can offset a gain and rebalance your allocation in line with your goals.
- Selling a portion of a highly appreciated stock to avoid an overweight or highly concentrated position that can compromise your allocation or jeopardize your results.
- Avoiding market timing, a practice where investors seek to buy at or near the lowest price and sell at a high. Consider this: the Dow Jones Industrial Average in 2024 had closed at a record high more than 20 times this year through mid-July. An investor who left a supposed “can’t-go-higher” market in March to be on the sidelines and await a pullback would have missed out on subsequent market gains.
“A long savings horizon, time-tested investment principles and professional advisor guidance are among the best tools for investors along their financial journey,” said Liu.
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The content in this article is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice. Neither BOK Financial Corporation nor its affiliates offer legal advice.
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