Asset Allocation

Asset Allocation

Asset allocation is an investment strategy with a goal of balancing risk and reward by allocating assets according to an individual’s goals, risk tolerance, and investment horizon. The three main asset classes to focus on are equities, fixed-income, and cash/equivalents. These three classes have different levels of risk, behave differently over time, and they provide different amounts of return.

Why is it important to have a diverse portfolio?

It is impossible to pick the correct asset allocation to get exactly what you are looking for, but being diversified helps get closer to that goal. The consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make, even more important than selecting individual securities. Different asset allocations are used for different goals.

For example, someone who is saving for a new car in the coming years would invest her funds in a conservative mix of cash, CD’s, and short term bonds. Someone who is saving for retirement that could be decades away might invest his IRA in stocks as he has more time to ride out the market fluctuations. Risk tolerance also plays a huge role in picking investments. Someone who doesn’t like taking risks might invest their money in a more conservative allocation even if they have a long time horizon.

How age plays a role in asset allocation:

It is believed that if you plan to stay invested for longer than five years, stocks are recommended. Cash and money markets are generally recommended for investments lasting under a year, and bonds fall somewhere in between. A good rule to follow is to subtract your age from 100 to determine how much should be invested in stocks. For example, a 60 year old would be 40% invested in stocks. Remember, this is just a general rule, and everyone is slightly different.

Asset allocation through mutual funds:

Asset allocation mutual funds are a way for investors to create portfolio structures that address an investor’s age, risk tolerance, and objectives with an appropriate allocation of assets. A variable asset mutual fund has the ability to gradually shift and go “overweight” on some asset classes depending on market conditions.

*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Asset allocation does not ensure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing in mutual funds involves risk, including possible loss of principal.