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Why Asset Allocation Matters in Uncertain Times

Wells Fargo Investment Institute - February 11, 2019

Key Insights

  • The wide performance swings over the past two years demonstrate a key principle of asset allocation —that asset returns and rankings vary from year to year—but over multiple year time periods, asset class performance tends 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 2017 and 2018.
  • Holding a concentrated portfolio of riskier assets could result in greater portfolio downturns when markets correct. Holding a diversified portfolio that helps to control downside risk could be advantageous during times of market stress. 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 the report (PDF)