Asset allocation is the most important decision for investors, writes Peter Watson.
Stocks have a higher expected rate of return than bonds. They also have a higher amount of uncertainty and volatility.
Bonds have a lower expected rate of return. They are less volatile and the risk of losing money is far less than owning stocks.
The trade-off between stocks and bonds is dependent on your financial objectives, and particularly on your time horizon. For example, if you plan to buy a house in the near future, bonds might be more attractive because they are less likely to lose value than a stock.
If you are planning for the long term, for example retirement, then owning stocks will have a higher expected return and although you can expect more volatility, a longer-term time frame reduces that risk.
Someone with a long-term focus who has the ability and the temperament to accept risk, will likely own mostly stocks.
A shorter-term focus and somebody who is more risk adverse will likely own more bonds.
Most investors take a balanced approach. For example, their portfolio could include 60 per cent stocks and 40 per cent bonds.
We suggest articulating your financial objectives. Understand your time frame. Be aware of the potential return and volatility between stocks and bonds.
The result is a portfolio allocated in a manner that fits your circumstances.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Watson provides wealth management services through Watson Investments. He can be reached at www.watsoninvestments.com
