Gain Perspective on Financial Planning. Investments. Your Future.

What You Need to Know About Asset Allocation

Asset allocationWas Miguel Cervantes’ Don Quixote fighting imaginary windmills or market volatility when he said, “Don’t put all of your eggs in one basket?” Putting all of your assets in one basket doesn’t keep them as safe as you might think because there is always a risk that you might lose them all at once.

The way to counter this is the investment strategy of asset allocation. Asset allocation, or diversification, may be even more important than picking the “right” stocks.

The idea is to diversify your money among different types of assets, such as equities, fixed income, and cash and its equivalents, rather than putting all your money into one single asset class.

Minimize potential losses

The main reason for practicing asset allocation and having a diversified portfolio is to minimize potential losses. If you invest in a single asset class, and it does badly, you could sustain a heavy loss. However, if you spread your investments among different asset classes, if one class performs poorly, your losses could be mitigated by holdings in different, hopefully better-performing asset classes. For example, historically, when bonds tend to have low interest rates, stocks rise in value, and in periods of high interest rates, bonds outperform stocks. Of course, past performance is no guarantee of future returns.

How to determine your asset allocation

How do you choose which asset classes to invest in, and in which proportions? This depends on your personal situation and goals. If you want to save for a specific, short-term goal, you would put more of your money into liquid assets that minimize jeopardizing the principal, such as certificates of deposit (CDs), money markets, or cash. However, if you are investing for the long term, you might include a larger proportion of stocks and other growth investments in your portfolio. As the goal is more long term, you have more time to ride out market fluctuations.

To find out more about asset allocation and the importance of having a diversified portfolio, read this.

 

Douglas Goldstein, CFP®, investment advisor, is the co-author with Grandmaster Susan Polgar of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing and director of Profile Investment Services, Ltd. which specializes in cross border investing and financial planning.

Profile Perspectives is a personal finance blog based on articles Doug Goldstein, CFP®, director of Profile Investment Services, Ltd., published in The Jerusalem Post. The information posted is purely informational and does not constitute investment or tax advice. Advertisements on the site are neither endorsements nor recommendations. Consult your professional advisors before making any investments based on articles or advertisements. Securities offered through Portfolio Resources Group, Inc., member of FINRA, SIPC, MSRB, FSI. Accounts carried by Pershing LLC., Member NYSE/SIPC, a subsidiary of The Bank of New York Mellon Corporation.

Privacy Policy | Disclaimer