Asset allocation can help you manage the level and types of risks you face.
Managing your financial wealth means striking a balance between protecting and growing your wealth and managing risk. When it comes to your finances, balancing your investment portfolio requires careful consideration of risk and reward. Learning more about asset allocation will help you make smarter investment decisions based on an understanding of your unique circumstances, your family and your goals.
Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may offer growth potential. Others may provide regular income or relative safety, or simply serve as a temporary place to park your money. And some investments may even fill more than one role. Because you likely have multiple needs or desires, you probably need some combination of investment types, or asset classes. Balancing how much of each asset class should be included in your portfolio is a critical task. That balance between growth, income and safety is called asset allocation, and it can help you manage the level and types of risks you face.
The combination of investments you choose can be as important as your specific investments. Your mix of various asset classes, such as stocks, bonds and cash alternatives, generally accounts for most of the ups and downs of your portfolio’s returns.
Ideally, your portfolio should have an overall combination of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others designed to provide a higher potential return but involve more risk. However, asset allocation doesn’t guarantee a profit or eliminate the possibility of investment losses.
There is not a universal method for determining the right asset allocation for every individual. Someone living on a fixed income, whose priority is having a regular stream of money coming in, will need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that’s 30 years away. Even if two people are the same age and have similar incomes, they may have very different needs and goals, and your asset allocation should be tailored to your unique circumstances.
And remember, even if your asset allocation was right for you when you chose it, it may not be right for you now. It should change with your circumstances, and as new ways to invest are introduced. A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too. iBi
Marty Roth is a certified financial planner and director with McGladrey Wealth Management LLC in Peoria. Original article prepared by Broadridge Investor Communication Solutions, Inc.