An investment management process to weather all seasons

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Following a disciplined investment process and working with Matt can give you confidence that your investment portfolio is appropriate for you based on your investment goals, time frame and risk tolerance and that, with regular monitoring, you remain invested to meet those investment goals.

Within the Advisory Platform at Wells Fargo Advisors, we offer managed portfolios that are based upon the guidance of Wells Fargo Investment Institute’s capital market assumptions, strategic asset allocations and the investment insight of the strategy teams to determine recommended portfolio allocations. Wells Fargo Investment Institute – Who We Are

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Wells Fargo Private Bank (The Private Bank) offers products and services through Wells Fargo Bank, N.A., Member FDIC, and its various affiliates and subsidiaries. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

In a managed portfolio, investment selection, due diligence, ongoing monitoring and documentation are provided, which can help ensure that your portfolio remains invested according to your investment objectives.

Utilizing a managed portfolio can offer you the confidence that your investments are being monitored as part of the due diligence process. And, as markets fluctuate, your portfolio is being rebalanced to remain consistent with your risk and return objectives, helping to remove the emotion of adjusting your portfolio based upon short-term market fluctuations.

Matt strives to ensure that the information is clear, understandable, and focused on helping you reach your long-term financial objectives. We are careful to consider all factors relevant to investment decisions – risk/reward levels, life-stage planning, estate strategies and others, as appropriate.

We apply modern portfolio theory as a starting point in constructing our strategic asset allocations. The modern portfolio theory was originally developed by Nobel Prize Laureate Harry Markowitz in 1952. It hypothesizes the existence of an efficient frontier of optimal portfolios that offer the maximum possible expected return for a given level of risk. Since its introduction, the theory has received broad acceptance in academia and in the financial industry. Asset allocation is the foundation for our investment approach, and may include fixed income, equities, and real assets.

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Portfolios that diversify across different asset classes generally have historically achieved returns with less volatility risk than many individual asset classes provided. We believe that a disciplined asset allocation strategy provides diversification to a portfolio – and can help smooth out performance over time. A smoothing effect has the potential to promote compounding returns and, we believe, can motivate investors to stay committed to their longer-term investment plan. A diversified allocation is designed to help mitigate portfolio volatility over longer periods of time, but it may also accomplish this objective over shorter periods of significant fluctuations

Below is an overview of key investment principles:

Think long-term

Today, everything you might want to know about the markets, a particular sector, or an individual stock is as close as the nearest television, computer, or smartphone, 24 hours per day. Although this constant barrage of information can be useful, it can prove to be of little value for long-term investors. In fact, if it causes you to become overly focused on what’s going on this week, day, and/or hour, we believe such information can actually be detrimental. Making investment decisions based on short term market activity can make it more difficult for you to work toward your long-term goals.

If you find yourself anxiously awaiting the latest newsflash whenever there’s market volatility, you may need to change the channel, turn off the computer, or simply ignore the alerts on your phone. Instead of focusing on what’s happening this minute, you may be better off considering the market’s historical performance and how volatility is generally part of a pattern the market has repeated on a fairly regular basis.

The more you understand the market, historical returns, and volatility, the better the investment decisions you’re likely to make. The chart below shows the performance of the Standard & Poor’s 500® since 1965. Disruptive forces such as geopolitical crises, terrorist attacks, economic recessions, scandalous media leaks, or consequential central bank policies can trigger short-lived yet influential episodes of market volatility.

Even serious financial crises, like the one that contributed to the 2008 market downturn, historically have recuperated over the course of the market cycle. Investors who thought long-term were eventually rewarded. Of course, past market performance is no guarantee of future results. You cannot invest directly in an index.

The times when it's hardest to invest may be the best
Historically, difficult periods have proven to be good times to invest in stocks. Performance of the Standard & Poor's 500 Index and Dow Jones Industrial Average, 1965 - 2021

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Review your asset allocation

In theory, investing is all about numbers: balance sheets, earnings, and ratios. However, in reality, emotions play a big role. When times are good, investors can become overly enthusiastic buyers. When things turn south, investors often sell assets without fully considering the long-term implications. Generally, neither practice makes for smart investing.

During times of volatility, it’s often important to stick with your asset allocation to avoid making investment decisions based on emotion. Your asset allocation should be designed to help you reach your desired return with a risk level you’re comfortable with. It defines what asset classes belong in your portfolio and in what proportion to each other based on where you are today, where you want to go, and how long you have to get there. Unless something has changed significantly in your life (a birth, death, etc.) that may result in a need to change your goals and tolerance for risk, it’s often best to leave your allocation as-is.

Changing your allocation based on a particular asset class’s current performance is seldom a good idea. As the chart below shows, predicting what investment will do well based on its recent performance is difficult to do. A “hot” sector, for example, in the coming months could suddenly fall out of favor with investors. You’re usually better of buying an investment because it fills a hole in your asset allocation rather than because it’s the current “flavor of the day.”

There’s no telling which investments will perform better or worse from one year to the next. One year’s leader can be the next year’s laggard, and vice versa. This chart shows how various asset classes have performed during the past 15 years. For example, notice how bonds — a relatively stable asset class — have been among both the best and worst performers as well as just about everything in between.
 
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Asset allocation can be the most important investing decision                     


Each of an investor’s financial goals has different attributes: priority; time horizon; and the need for liquidity, income, or growth. As a result, each goal has a unique investment objective – and a distinct combination of assets that is most likely to help achieve the goal. Establishing this combination (or strategic allocation) is one of the most important investment decisions. As shown on the chart, the strategic allocation has been the biggest determinant of portfolio return variability (the year-to-year variation in returns). 

Studies have shown asset allocation is often a crucial determinant of portfolio performance. The other factors shown in the following chart have proven to have much less impact on the variability of returns over time. Strategic asset allocation has a 10 – to 15 – year horizon, while tactical asset allocation has a 6 – to 18 – month time horizon. Strategic allocation, therefore, deserves considerable focus and effort.
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Our process for creating asset allocation involves many steps, blending historical analysis with our future expectations for capital market performance over the strategic time frame (10 – 15 years). Asset allocation process

Use diversification to help manage risk and return

Among its potential benefits, we believe diversification is likely to generate more consistent returns. As a result, over the long term, a diversified portfolio may increase more in value than one that produces more volatile returns, which is the likely result of being concentrated in a single asset class. Of course, diversification does not guarantee investment returns or eliminate the risk of loss.

Unfortunately, no one can know with certainty what the best – or worst-performing asset class will be in any given year. An investor who chooses to own only one asset – US large-cap stocks, for example – with the hopes it will be the best performer that year could suffer disappointing results. The bottom line is putting all your eggs in one proverbial basket can significantly impede investment results and the ability to achieve your long-term goals.

Experience has shown that long-term investors are more likely to achieve consistent results and grow their assets over time if they hold a diversified portfolio. We think that’s because a diversified portfolio is more likely to benefit from growth opportunities across many different asset classes, not just one or two.

Another benefit of portfolio diversification is it can help mitigate volatility of overall returns. The average return of a portfolio filled with an assortment of diversified assets is likely to fluctuate less year to year than the annual returns of the individual assets that make up the portfolio.

Once your asset allocation is set, we believe it’s important to rebalance your portfolio, at least annually, back to your intended allocation if the markets have moved significantly or you’ve experienced a noteworthy life event (such as a birth, death, or divorce). It’s likely you’ll be better off ignoring day-to-day fluctuations in the markets and focusing on your long-term plan.

A diversified portfolio’s most important benefit may be that it can help mitigate the effects of unanticipated risks. Unexpected events can happen at any time and such developments typically affect some assets more than others. We believe the best approach for investors to deal with uncertainty is to hold a diversified portfolio that includes some asset classes that tend to be less impacted by market surprises.

Investors face many types of risk and uncertainty. Although the equity market historically has trended upward, investors must frequently deal with market volatility. Market timing rarely works, and we do not suggest this approach for investors. Instead, we believe a strategic and tactical asset allocation strategy*, including a diversified portfolio and regular rebalancing, can offer an optimal approach for investors over the long term.

*Tactical asset allocation: Making short-term adjustments to asset-class weights based on shorter-term expected relative performance. Strategic asset allocation: An investor’s return objectives, risk tolerance, and investment constraints are integrated with long-term return assumptions to establish exposure to permissible asset classes.

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. Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.