If you’re like me and when you think of asset allocation you instantly think of a pie chart. Instead of a boring pie chart, I thought I would start off with something a little more inviting, hence; the nice “Apple Pie” chart above (I think it’s apple pie at least). Asset allocation does no t refer to one of America’s greatest dessert traditions, however. Asset allocation refers to the way in which you weigh diverse investments in your portfolio in order to try to meet a specific objective.
Investments can be grouped into three major asset classes: Stocks, bonds and money market instruments. Stocks generally have the highest risk, but also the greatest potential return. Money market instruments carry the least risk, but have the lowest potential return, and bonds fall somewhere in the middle. The asset classes you choose, and how you weight your investment in each, will depend upon your investment time frame, risk comfort level and other individual considerations—and how these match with the risks and rewards of each asset class. Generally, your asset allocation will change as you reach different stages in your life and as your investment goals change along with these shifts in lifestyle.
Diversification—investing in several different types of investments—works hand in hand with asset allocation by increasing the chance that, if and when the return of one investment is falling, the return of another in your portfolio may be rising.
In today’s complex financial markets, you have an impressive array of investment vehicles from which to select. Each investment also carries risks such as loss of your investment, making it important to choose wisely if you are selecting just one. The good news is that there’s no rule that says you must stick with only one type of investment. In fact, you can potentially lower your investment risk and increase your chances of meeting your investment goals by practicing “asset allocation.”
What is Asset Allocation?
Asset allocation refers to the way in which you weigh diverse investments in your portfolio in order to try to meet a specific objective. For instance, if your goal is to pursue growth and you’re willing to take on market risk in order to do so, you may decide to place 20% of your assets in bonds and 80% in stocks. The asset classes you choose, and how you weigh your investment in each, will probably hinge on your investment time frame and how that matches with the risks and rewards of each asset class. […]
