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Private WealthManagementwilliamblair.com Asset Allocation:Your Biggest Investment Decision Building and managing a portfolio is a continual process that involvesnumerous decisions. But none of those decisions is more important thanhow you allocate your wealth across different asset classes. Introduction Your financial plan is a road map for achieving your personal goals throughout yourlifetime. It encompasses a variety of planning areas such as income and cash flow,retirement goals, charitable giving, taxes, estate structure, and wealth transfer. For many,however, the most important aspect of financial planning is developing an asset allocationstrategy that is aligned with your risk tolerance, time frame, and financial resources. William Blair’s Dynamic Allocation Strategies team co-published a study1in 1991 that foundthat 91.5% of the variability of a portfolio’s returns is attributable to asset allocation. The simple definition of “asset allocation” is how much of your portfolio is invested ineach of the various asset classes, such as cash, stocks, and bonds, as well as real estate orother alternative assets. The appropriate asset allocation strategy for you will depend on your risk tolerance andthe return you hope to achieve to meet your goals. Your risk tolerance will also be influencedby your time frame for achieving your goals, your financial situation, and your personalfeelings about money and investing. By developing and implementing an asset allocationstrategy that fits your particular goals and situation, you can take more control of yourfinancial plan. To help you think strategically about asset allocation, this paper will examine: • Developing your strategy• Achieving meaningful diversification• Monitoring your allocations and reviewing your plan Developing Your Strategy Weighing Other Factors Developing Your StrategyThere is systematically prescribed asset allocation for an individual investor. Each investor needs to considerhis or her own tolerance for risk, their unique financial andtax situation, and most importantly, their long-term goalsand objectives. The right balance for one investor will notnecessarily be the right balance for another. What follows isa closer look at some of the factors to consider as you workwith your wealth advisor to develop an asset allocationstrategy that is tailored to your unique needs. Taxes Taxes on capital gains, dividends, and ordinary incomeplay a significant role in determining how much of yourportfolio you actually get to keep. Enhancing the taxefficiency of your portfolio should be an important elementof your asset allocation strategy. For example, investors inthe highest tax bracket may want to allocate more assetsto tax-exempt municipal bonds or to equities that willproduce long-term capital gains rather than to taxablebonds or other investments that are taxed at the highestmarginal rate. Similarly, if you have a Roth IRA, it maybe advantageous to place higher growth investments inthat account in order to take advantage of the tax-freecompounding over time. This step of locating investmentsin specific account types, or “asset location” can have asignificant long-term impact on future asset values. Defining Your Goals The first step in developing an asset allocation strategyis to articulate your goals. Consider core goals such asyour vision of retirement, the extent to which you want totransfer wealth to family members, and your philanthropicobjectives. Also consider dreams you may want to pursue,such as starting a business, owning a vacation home, orcreating a family legacy. Concentrated stock positions Next look at how much money each goal will require.If your goal is to buy a vacation home in two years,you may already have an accurate idea of what the likelycost will be. If the goal is further down the road, suchas maintaining your current lifestyle when you retirein 20 years, it may be harder for you to determine. YourWilliam Blair wealth advisor can help you develop realisticestimates of the resources needed for each goal. If you are a business owner or corporate executive, alarge percentage of your wealth may be tied to the fortunesof a single company. In addition to receiving much ofyour income from the company, you may also have largeholdings in company stock or stock options. To achievean appropriate risk/return profile, your asset allocationstrategy must account for existing concentrated equitypositions and any restrictions on the sale of the stock.It may make sense to balance a concentrated exposureby creating a conservative portfolio that, when blendedtogether with your equity in the business, could reduceoverall risk exposure. Assessing Your Risk ToleranceThe time frame for a particular goal may have a major impact on your risk tolerance. A longer time frame givesyou more opportunities to recover from an investmentloss. Therefore, in many cases a longer time frame couldbe conducive to a higher risk tolerance. For examp