Investment Read Time: 4 min

Asset Allocation

If you live in or have visited a big city, you’ve probably run into street vendors – people who sell everything from hot dogs to umbrellas – on the streets and sidewalks. Many of these entrepreneurs sell completely unrelated products, such as coffee and ice cream.

At first glance, this approach seems a bit odd, but it turns out to be quite clever. When the weather is cold, it’s easier to sell hot cups of coffee. When the weather is hot, it’s easier to sell ice cream. By selling both, vendors reduce the risk of losing money on any given day.

Asset Allocation

Asset allocation applies this same concept to managing investment risk. Under this approach, investors divide their money among different asset classes, such as stocks, bonds, and cash alternatives, like money market accounts. These asset classes have different risk profiles and potential returns.1

The idea behind asset allocation is to offset any losses from one class with gains in another, and thus, reduce the overall risk of the portfolio. It’s important to remember that asset allocation is an approach to help manage investment risk. It does not guarantee against investment loss.2

Determining the Most Appropriate Mix

The most appropriate asset allocation will depend on an individual’s situation. Among other considerations, it may be determined by two broad factors.

  1. Time. Investors with longer timeframes may be comfortable with investments that offer higher potential returns, but also carry a higher risk. A longer timeframe may allow individuals to ride out the market’s ups and downs. An investor with a shorter timeframe may need to consider market volatility when evaluating various investment choices.
  2. Risk tolerance. An investor with higher risk tolerance may be more willing to accept greater market volatility in the pursuit of potential returns. An investor with a lower risk tolerance may be willing to forgo some potential return in favor of investments that attempt to limit price swings.

Asset allocation is a critical building block of investment portfolio creation. Having a strong knowledge of the concept may help you when considering which investments may be appropriate for your long-term strategy.

1. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity investors will receive the interest payments due plus their original principal, barring default by the issuer. Money market funds seek to preserve the value of your investment at $1.00 a share. Money held in money market funds is not insured or guaranteed by the FDIC or any other government agency. It’s possible to lose money by investing in a money market fund. Mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
2. Investments seeking to achieve higher potential returns also involve a higher degree of risk. Past performance does not guarantee future results. Actual results will vary.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

Financial Fixes: From Health Scare to Financial Care

Financial Fixes: From Health Scare to Financial Care

A medical scare can be a wake-up call in terms of your physical and financial health. Here’s how to strengthen your finances

5 Ways for Caretakers to Make Your Well-Being a Priority

5 Ways for Caretakers to Make Your Well-Being a Priority

Studies show that now more than ever, today’s women are disproportionately responsible for caring for children, doing laundry, cooking and cleaning, despite many having full-time careers. What’s more, when compared to their male counterparts, women are also more likely to report having difficulty finding the time to manage their physical, mental and emotional health.

5 Ways to Control Your Vacation Budget

5 Ways to Control Your Vacation Budget

You work hard. You deserve a vacation, whether you go with family or friends or go solo. But what happens when your budget starts spiraling out of control? Here are five strategies to keep your dream vacation from turning into a nightmare.

 

Have A Question About This Topic?







Thank you! Oops!

Is a Variable Annuity Right for Me?

Pundits go on and on about how “terrible” or “wonderful” annuities are, but they never talk about whether annuities are right.

Choose Your Own Retirement Adventure

Retirement is one of the greatest adventures you’ll have. Which retirement adventure will you choose?

Bull & Bear Markets: A Timeline

This helpful infographic will define bull and bear markets, as well as give a historical overview.

View all articles

Saving for Retirement

This calculator can help you estimate how much you may need to save for retirement.

Taxable vs. Tax-Deferred Savings

Use this calculator to compare the future value of investments with different tax consequences.

Capital Gains Tax Estimator

Use this calculator to estimate your capital gains tax.

View all calculators

An Inside Look at Retirement Living

A number of questions and concerns need to be addressed to help you better prepare for retirement living.

Principles of Preserving Wealth

How federal estate taxes work, plus estate management documents and tactics.

5 Smart Investing Principles

Principles that can help create a portfolio designed to pursue investment goals.

View all presentations

Coaches

Coaches have helped you your whole life, in ways big and small. We’d like to be one of them.

Encore Careers: Push Your Boundaries

Ready for retirement? Find out why many are considering encore careers and push your boundaries into something more, here.

The Power of Compound Interest

Learn how to harness the power of compound interest for your investments.

View all videos