If there’s one lesson to be learned from the market in recent years, it is this: the markets don’t always follow a smooth path. There will be interruptions along the way and different asset classes — stocks, bonds and cash — generally react differently to economic conditions.
That’s why the concept of asset allocation — diversifying your portfolio with a strategic mix of stocks, bonds and short-term instruments — can be critical to helping you achieve your financial goals while also managing your own tolerance for risk.
The first step in any investment strategy is to have a clear idea of what your long-term goals are. Whether it’s a comfortable retirement, second home, or leaving a legacy for your children or grandchildren, having a plan for your long- and short-term financial goals can help make it easier to ride out the inevitable ups and downs of the financial markets. The goal of asset allocation is simple: to optimize return potential for a stated level of risk. Or to put it more precisely, to identify the most efficient mix of assets that will provide the highest potential for return, given the level of risk you are willing to assume.
It’s important to remember that asset allocation and diversification cannot assure a profit or protect against loss. However, strategically combining asset classes increases the possibility of reaping the potential long-term returns of each asset class, while, to a degree, smoothing out the inevitable ups and downs of the various equity and bond markets.
When seeking an asset allocation strategy, investors should consider a mutual fund with an active approach, rather than the passive option. Active management has certain characteristics that may help manage market volatility and provide downside protection by employing tactics such as:
- Market monitoring
- Portfolio rebalancing
- Risk management
Of course, active management entails the risk that the investment techniques and risk analyses applied will not produce the desired results and that certain policies or developments may affect the investment techniques available to managing certain strategies.
Challenge: Staying on top of asset allocation
Without regular monitoring and rebalancing efforts, passively set portfolio allocations can quietly drift toward a lopsided weighting that can result in unintended risks in the overall portfolio.
Solution: Investing with an active portfolio allocation manager
Consider a manager that employs active management strategies specializing in managing the strategic and tactical weightings. The manager of Dreyfus Balanced Opportunity Fund, EACM Advisors, provide an active management approach, seeking to maximize total return while dampening downside risk.
WHY REBALANCING MATTERS
The hypothetical chart below shows that if an investor had passively mirrored Dreyfus Balanced Opportunity Fund’s portfolio weightings on 12/31/12 of 68% equities and 32% in fixed income, and did not rebalance the account for 5 years, the portfolio on 12/31/17 would have an equity weighting of 81%.
Source: EACM Advisors, December 2017
Challenge: Rising interest rates
Rising interest rates may have a negative impact on both passive equity and fixed income holdings.
Solution: Active management
Active managers have historically outperformed in periods of rising interest rates.
Source EACM Advisors, 2017: "Active Funds Excess Return" is represented by data from Morningstar (US Funds Large Blend Category Average); "UST 10y Yield" is represented by data from the Federal Reserve Bank of St. Louis (10-Year Treasury Constant Maturity Rate, Percent, Monthly, Not Seasonally Adjusted). The analysis of excess returns above is based on a comparison of the monthly returns of the Morningstar Category Average relative to its benchmark (Standard & Poor’s 500 Index), and was compiled by EACM using MPI Stylus. All excess return results shown are cumulative, unannualized and geometric. The above is for illustrative purposes only. Past performance is not indicative of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Any statements of opinion constitute only current opinions of EACM, which are subject to change and which EACM does not undertake to update.
Delivering an Active Management Approach With Asset Allocation
Dreyfus Balanced Opportunity Fund
1Strategy allocations as of 12/31/17, unless otherwise noted. Strategy allocations will vary and are subject to change without notice. Subject to board approval, Dreyfus may hire, terminate or replace portfolio managers and modify material terms and conditions of portfolio management arrangements without shareholder approval.
The fund’s investment adviser is the Dreyfus Corporation (Dreyfus). Keith Stransky is the fund’s Portfolio Allocation Manager, a position he has held since March 2007. Mr. Stransky serves as Chief Investment Officer (Traditional) and a Senior Portfolio Manager for EACM Advisors LLC (EACM). The Portfolio Allocation Manager monitors and evaluates the performance of the equity and fixed income portfolio managers of the fund, and has the discretion to change the allocations to these portfolio managers when deemed appropriate. The Portfolio Allocation Manager also advises and recommends to Dreyfus and the fund’s board any changes to the fund’s portfolio managers. Dreyfus has ultimate responsibility (subject to oversight by the board) to supervise all the portfolio managers of the fund and recommend the hiring, termination and replacement of portfolio managers to the board.
EACM and BNY Mellon Asset Management North American Corporation (BNY AMNA) investment professionals manage Dreyfus‐managed funds pursuant to a dual‐employee arrangement, under Dreyfus’ supervision, and apply their firm’s proprietary investment process in managing the funds.
For more information on Dreyfus Balanced Opportunity Fund, please contact a Dreyfus Representative