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Why Asset Allocation Matters in Uncertain Times

Wells Fargo Investment Institute - February 2019

Wells Fargo Investment Institute recommends that investors consider building a globally diversified portfolio in an effort to smooth returns over time. Veronica Willis, Investment Strategy Analyst, explains why in this month’s video.

Transcript: Why Asset Allocation Matters in Uncertain Times

Asset class performance in 2018 was the mirror opposite of 2017.
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All asset classes posted positive returns in 2017, with equities leading the way, while the majority of asset classes fell in 2018, with most equity asset classes lagging fixed income. Yet, if we consider the two-year returns on an annualized basis, returns appear more normal. The wide swing in performance over the past two years demonstrates a key principle of asset allocation, that asset price returns and rankings vary from year to year, but over longer time periods, asset class performance has the tendency to smooth out.
A diversified portfolio is designed to help reduce portfolio volatility over longer time periods, but it also has the potential to accomplish this objective over shorter periods of significant return fluctuations, as we experienced in 2017 and 2018.
Title graphic: Choosing the right asset allocation

Holding a concentrated portfolio of riskier assets, like stocks for example, could result in greater portfolio downturns when markets correct. Holding a diversified portfolio of assets that potentially can help manage downside risk could be advantageous, despite the tendency for many assets to move lower during times of market stress. In our opinion, investors should follow an asset allocation strategy appropriate for their individual situation through short-term market disruptions, based on their financial goal, time horizon, and risk tolerance. That includes the ability and willingness to withstand short-term market fluctuations.
Our strategic asset allocation models are constructed utilizing our 10- to 15-year Capital Market Assumptions, which are estimates of how asset classes and combinations of classes may respond during various market environments. Of course, CMA forecasts and returns are not promises of actual returns or performance that may be realized. They are based on estimates and assumptions that may not occur.

These reflect the trends that we believe investors are most likely to experience during the next full market cycle or two. A shorter time horizon may call for a more conservative asset allocation, while an investor with a longer time horizon may be able to wait out market downturns.
Title graphic: Investor implications
In recent years, outperformance of U.S. assets compared to international equities and fixed income has contributed to better performance for portfolios geared toward U.S. assets only. However, looking at longer time frames, a more globally diversified portfolio has outperformed.

Strategic allocations are designed for a 10- to 15-year time horizon, which means that equities or fixed income may outperform over a short time frame. Yet, historically, over longer time periods, mixing these asset classes has resulted in more efficient portfolios.
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In any given year, one asset class will outperform all others, but the top-performing and worst-performing asset class changes from year to year. Instead of attempting to guess winners or losers by timing the market, we recommend investors consider building a globally diversified portfolio and then review and rebalance their holdings regularly in an effort to smooth returns over time.

General Disclosures
The opinions expressed reflect the judgment of the speaker as of the recording date and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results. Additional information is available upon request.
Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.
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