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Why Asset Allocation Matters in Uncertain Times

Wells Fargo Investment Institute - February 4, 2021

Key takeaways

  • The wide performance swings over the past several years demonstrate a key principle of asset allocation — that asset returns and their rankings vary from year to year — but historically, over multiple-year time periods, asset-class performance has tended to smooth out.
  • A diversified portfolio is designed to help reduce volatility over multiple-year time periods, but it also can accomplish this goal over shorter periods of significant return fluctuations, like we saw in 2020 with a sharp downturn and quick recovery.
  • Holding a concentrated portfolio of riskier assets could result in greater portfolio downturns when markets correct. Holding a diversified portfolio with the potential to mitigate downside risk could be advantageous during times of market stress. We believe investors should follow an appropriate asset allocation strategy through short-term dislocations.
  • A well-defined strategy can help investors avoid making emotionally driven financial decisions. Some common behavioral biases include: chasing past winners and losers and recency bias, or trading based on recent trends.

Download a PDF version of this report