Asset management is the work of deciding how your money is divided among different kinds of investments, and then keeping that mix on target as markets and your life change. Saving is the first step toward financial security. Asset management is what turns savings into a portfolio that can grow while staying within the level of risk you can live with.
Asset Management, Investment Management and Wealth Management
These terms are often used interchangeably, and they overlap. In everyday use, asset management usually refers to how a portfolio is built and maintained: which asset classes it holds, in what proportions and how it is rebalanced. Investment management is a broader term that also includes choosing the individual holdings and controlling what they cost. Wealth management goes further still, combining investments with tax, retirement, insurance and estate planning. We explain the investment side in more detail in What Is Investment Management and Why Is It Important?
Asset Allocation Comes First
The most important decision in asset management is the mix of stocks, bonds and cash. Stocks have historically offered the most long-term growth, with larger swings along the way. Bonds generally provide income and more stability. Cash is the most stable and the least likely to keep up with inflation. How much of each you hold drives more of your portfolio’s behavior than any single investment does.
The right mix depends on when you will need the money and how much of a decline you can tolerate without changing course. At Toomey Investment Management we use nine core portfolio models, ranging from Ultra-Conservative, with about 40% in stocks, to Ultra-Aggressive Core, with about 98% in stocks, and we match one to each client’s time horizon, risk tolerance and account type. You can see each model on our fee-based asset management page.
Diversification Within Each Asset Class
Once the broad mix is set, diversification spreads money across different companies, industries, regions and types of bonds. Markets are unpredictable, and when one area struggles another may hold up. Diversification does not eliminate risk or guarantee a return, but it reduces how much any single investment can hurt you.
Asset Location: Where Each Investment Is Held
It also matters which account holds which investment. Investments that produce a lot of taxable income may be better held in an IRA or 401(k), while those expected to grow over time may suit a taxable or Roth account. In taxable accounts for higher-income clients, municipal bonds can reduce the tax bill, which is the idea behind our Tax Favored Income and Growth model. Matching investments to account types is one of the quieter ways asset management adds value.
Rebalancing Keeps Risk on Target
Markets move a portfolio away from its target over time. After a strong year for stocks, a portfolio meant to be 60% stocks may drift to 70%, carrying more risk than intended. Rebalancing sells some of what has grown and buys what has lagged, bringing the mix back in line. It also builds in the discipline of selling high and buying low. Because we trade US equities without commissions or transaction fees, rebalancing does not add trading costs for our clients.
Adjusting as Your Life Changes
An asset mix that fits at 35 rarely fits at 65. Early in a career the focus is usually growth. In the years before retirement it shifts toward protecting what you have built, and in retirement toward income and liquidity. Major events such as a marriage, an inheritance or a business sale can also call for a new mix. We review each client’s allocation at least once a year and whenever something important changes.
Why Cost Matters
Every fund expense, trading commission and advisory fee comes out of your return. Over decades, small differences in cost add up to large differences in what you keep. We start every client relationship by showing what your current investments really cost, and we are transparent about our own all-in cost.
Talk With Us About Your Portfolio
Toomey Investment Management is an independent registered investment adviser in Wallingford, Connecticut. If you would like a second opinion on how your money is allocated, call 203-949-1710 or contact us.
This article is for general information only and is not individualized investment advice. All investing involves risk, including possible loss of principal. Diversification and rebalancing do not guarantee a profit or protect against loss.