One of the key components to our investment portfolios is strategic asset allocation—how we thoughtfully spread your funds across different types of investments that align with your investment goals to try and maximize returns while balancing risk to achieve your investment goals.
Normally, figuring this out on your own can be accompanied by a lot of time, effort and uncertainty.
Luckily, we’ve built Marcus Invest to take on some of this heavy lifting for you. Based on what you tell us about your investment timeline and risk tolerance, we’ll actually recommend a strategic asset allocation approach we think best suits your needs (so you can sit back and let us do the work!).
Now let’s jump into what exactly strategic asset allocation is, as well as how we determine your strategic asset allocation.
Later on we’ll discuss the importance of rebalancing, and pull back the curtain on how exactly we rebalance your account(s) with Marcus Invest.
At its most basic level, asset allocation is how all of the assets in your portfolio (stocks, bonds, cash, so on) are divvied up. Strategic asset allocation takes that a step further, and works as a portfolio strategy in which target allocations are determined for various asset classes.
The idea behind our strategic asset allocation is to ensure that your portfolio aligns with your risk tolerance and is diversified, so if one asset class is down, ideally the others can help mitigate any losses.
We’ll recommend a strategic asset allocation that we think is the best fit for your risk tolerance and investment goals.
You can think about Marcus Invest’s strategic asset allocation as having two levels:
Based on your expressed willingness and capacity for risk in your investment portfolio, the more risk you’re willing to take on, typically the more of your portfolio we’ll allocate to stock ETFs, as opposed to bond ETFs. For more risk-averse investors (including those who might be closer to retirement), we’ll usually allocate a larger percentage to bond ETFs than stock ETFs.
Like we mentioned earlier, once your strategic asset allocation percentages are determined, we focus on the specific stock and bond ETFs to include in your portfolio.
Each investment has a unique set of characteristics that determine its behavior. Different types of investments perform better in different scenarios. We design our strategic asset allocations to perform a balancing act of sorts, so that your portfolio could navigate a variety of market conditions.
A few examples:
This might be a complicated process to determine on your own, but as we mentioned earlier, Marcus Invest can help by taking on some of this work for you.
Based on your responses to our questions, we’ll recommend a strategic asset allocation that we think is the best fit for your risk tolerance and investment goals. If we didn’t get it quite right on the first try, you can select an allocation one notch up or down from our suggestion, to be slightly more aggressive or slightly more conservative.
Once you’ve selected an investment or retirement account, we’ll recommend a portfolio aligned to your preferences that could help you reach your goal, based on your investment timeline and risk tolerance. Based on your unique input, what you’ll see in our recommendation will be what an appropriate mix of stock and bond ETFs might be for you.
Typically, the more risk you’re willing to take on, the more heavily you’ll invest in stocks. Stocks are typically more volatile than bonds, but historically also give greater returns. So it’s the old risk-and-reward trade-off.
On the other hand, if you start to feel a little stick to your stomach every time there’s a downtick in the market, you might want to hedge your stock holdings with some safer, less risky bonds.
Behind the scenes, each portfolio has a “Level 2” asset allocation breakdown that gets more specific at the asset class level (meaning it goes beyond just allocating the percentage of stock and bond ETFs).
For example, the mix of stock ETFs in our 10% stock, 90% bond portfolio will look different than the mix of stock ETFs in our 90% stocks, 10% bond portfolio.
The 10/90 portfolio is geared towards a more conservative investor who wants to prioritize generating income while taking a lower amount of risk, so it might include domestic stocks, like US Large Cap.
The 90/10 portfolio is built for a more growth-oriented investor who wants to see more aggressive growth and is willing to take on substantial risk, so their stock allocation might include greater allocation to more high-risk, high-reward investments like emerging markets and real estate.
Marcus Invest offers three unique portfolio themes that allow you to customize your approach. There’s a lot to learn about each, and you can read more about them here, but in a nutshell:
Your strategic asset allocation is based on what types of investments could be a good fit for you, and at what relative weights.
The portfolio theme you select determines which specific ETFs will be included in your portfolio, so you can invest according to your priorities.
If your portfolio were a coloring book, you could think of your strategic asset allocation as the outline, and then your portfolio theme determines what color makes up the actual picture.
Now it’s time to jump into the other part of this delicate equation: rebalancing. Rebalancing is essentially the process of periodically realigning the weightings of your assets within your account to align with your portfolio.
As the market moves (or you withdraw money/put more money in), your asset allocation may drift a little off your target allocation, and rebalancing can help bring you back on track.
Our technology monitors your account day in and day out to remain on the lookout for required rebalancing.
Say, for example, that your stock holdings have been doing really well as of late. Your strategic asset allocation was set at 50% stocks and 50% bonds.
With your stocks outperforming your bonds, though, your asset allocation has drifted to 55% stocks and 45% bonds. To get back to 50/50, certain assets will need to be bought or sold so your portfolio returns to the right mix.
Institutions and individual investors can all approach rebalancing a little differently. Some choose to rebalance periodically, on regular time frames (think monthly, quarterly, annually).
Others might choose to rebalance on an as-needed basis, whenever their portfolio drifts a certain percentage away from their target asset allocation, like in response to market activity.
At Marcus, we start by determining your strategic asset allocation, such as 60% stocks and 40% bonds (which we’ve already gone over!). Our team of investment professionals has determined a tolerance margin that your account can stay between as the market moves. That tolerance margin is also known as the “drift parameter,” essentially meaning how much your account can drift outside your target allocation before requiring rebalancing.
For example, our team might determine that your account can drift 2 points, so you might be 58% stocks, 42% bonds. As soon as your account drifts outside the drift parameters that have been determined for your account, your account will be flagged as needing to be rebalanced.
Rest assured, rebalancing is included in the cost of your annual advisory fee.
Our technology monitors your account day in and day out to remain on the lookout for required rebalancing. The software also recommends what trades could help you get back on track, and our team of (human) portfolio managers review all potential trades and execute them if they agree with the strategy.
Now you experienced investors might be looking at all that and wondering about the costs associated with said rebalancing moves. Rest assured, rebalancing is included in the cost of your annual advisory fee.
Plus, whenever we rebalance (or any time you make a withdrawal or deposit), we’re mindful of year-end tax implications. We apply tax lot relief methodology—essentially the practice of selling the assets with the lowest taxable gains first—to help you minimize this year’s tax bill* (you can read more about our tax lot relief methodology here).
*Not a substitute for consulting with a tax professional
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