Dan Hill discusses the importance of portfolio asset allocation
Listen to the interview on the Business Innovators Radio Network: Interview with Dan Hill, CFP®, AIF® CEO & Founder Hill Wealth Strategies Discussing Portfolio Asset Allocation
Dan Hill, CEO and founder of Hill Wealth Strategies, to discuss the critical topic of portfolio asset allocation. Dan explains the concept of asset allocation, emphasizing the importance of distributing investments across different asset classes to achieve optimal returns while minimizing risks. He highlights that finding the right balance is not a one-size-fits-all approach, as individual goals and risk tolerances vary significantly. Dan underscores the necessity of comprehensive planning to accurately assess how much risk an investor should take, noting that many individuals may unknowingly assume more risk than necessary.
Portfolio asset allocation is a crucial investment strategy that involves distributing an investor’s capital across various asset classes. The primary objective of this approach is to maximize returns while minimizing risk, and it is tailored to align with individual goals and risk tolerance.
At its core, asset allocation is about determining how much of an investor’s money should be allocated to different asset classes, such as stocks, bonds, and other investment vehicles. Dan Hill, CEO and founder of Hill Wealth Strategies, emphasizes that this process is not as simple as dividing funds into fixed percentages. Instead, it requires a comprehensive understanding of the investor’s unique financial situation, goals, and risk appetite.
When working with clients, financial advisors must first assess their goals and risk tolerance. This involves a detailed planning process, as many individuals may not realize how much risk they actually need to take to achieve their financial objectives. Hill points out that some investors may be taking on “uncompensated risk”—exposing themselves to unnecessary volatility without the potential for adequate returns.
To effectively tailor asset allocation, advisors engage in conversations with clients to uncover their retirement dreams and financial aspirations. This dialogue helps establish a “North Star” or a clear destination, guiding the allocation strategy. For instance, a younger investor in their 30s may be more inclined to take on higher risk for potentially greater returns, while someone in their 60s may prioritize capital preservation and income generation.
Diversification is a key component of effective asset allocation. Hill explains that a well-diversified portfolio includes a mix of large and small companies, both domestically and internationally. This approach is supported by nearly 70 years of academic research, which indicates that investing in a variety of asset classes can lead to better long-term returns.
For example, Hill advocates for a balanced allocation that includes:
- Large U.S. companies
- Small U.S. companies
- International large and small companies
- Value companies, which may be undervalued or in distress
By diversifying across these categories, investors can mitigate risk and enhance their potential for returns. Hill notes that many portfolios tend to be overly weighted in large companies, despite research suggesting that small companies often yield higher returns over time.
While risk is an inherent part of investing, it can be managed through strategic asset allocation. Hill emphasizes that risk is neither inherently good nor bad; rather, it must be measured and compensated appropriately. For instance, during periods of market volatility, investors may feel the urge to chase returns by increasing their risk exposure. However, this can lead to a cycle of chasing losses, which is counterproductive.
To maintain a balanced risk profile, Hill’s firm conducts regular portfolio reviews and rebalancing. This process involves adjusting the asset allocation to ensure it aligns with the investor’s original risk tolerance and financial goals. For example, if U.S. equities outperform international stocks, the portfolio may need to be rebalanced to maintain the desired allocation percentages.
Dan shared: “A lot of people are taking what we call uncompensated risk or unreimbursed risk because they’re taking a lot more risk or they’re exposed to a lot more volatility in their portfolio”
About Dan Hill
Dan Hill CFP®, AIF®, is a recognized Financial Educator, Best-Selling Author, Speaker, and Retirement Specialist who has appeared as a financial expert on CBS-Richmond’s Virginia This Morning and has contributed to USA Today, Wall Street Journal, Forbes, and others.
Dan is a Co-Author of the Amazon # 1 bestseller Retire Like a Shark, with Kevin Harrington, the original ‘Shark’ from hit TV show Shark Tank.
In his recent book release, Retire Abundantly, Dan explains how to separate facts from fiction in our dramatically changing retirement landscape. He’ll provide answers to some of your biggest questions, and answers to questions most of us do not even know to ask.
