Just like building or remodeling a home, your investment portfolio requires a selection process that is in line with your needs and goals. To do this, you must identify your objectives and an investment mix to help you pursue those goals.
When it comes to investing, greater reward generally carries greater risk. If you’re looking for a smart way to reduce investment volatility while still retaining growth potential, then consider the advantages of asset allocation.
Asset allocation is the process of deciding what percentage of your money to put into the three major asset classes: stocks, bonds, and cash. Because each type of asset responds differently to shifts in the economy and financial markets, some investments may be up while others may be down. With asset allocation, a portfolio may experience less fluctuation in value than individual assets within the portfolio.
This investment technique may have a significant impact on the ultimate success of your portfolio. In fact, asset allocation has been shown to have more influence on portfolio variance than any other single investment
decision. In a 1991 study by Brinson, Singer, and Beebower, asset allocation accounted for as much as 91.5% of the variation in total return, far outweighing other significant factors, such as market timing and security selection.
Asset allocation may help you maximize portfolio return at a reasonable level of risk, create a prudent diversification of investment assets, pursue financial goals, and accommodate your risk tolerance, investment time horizon, and tax situation.
Once you define your goals, time horizon, and funds needed, you can begin to choose appropriate asset classes, and diversification strategies, that will help develop the right portfolio for you.
You should also consider your tolerance for risk. For an investment strategy to work for you, it’s imperative that you’re comfortable with the risk you assume. Even though your financial situation may point toward a higher level of risk, your peace of mind might dictate a more conservative investment plan. Investing today is about more than just stock picks and bond selections. In fact, stocks and bonds are only a small part of the equation. It’s important to spread investment dollars over various asset classes. While diversification and asset allocation do not ensure a profit or protect against loss, a combination of money market, fixed income, and equity investments can provide potentially higher returns than either money market or fixed-income investments alone. The current investing environment offers numerous alternatives. Talk with your financial advisor about what investments might be best for you.