Building a Portfolio? Asset Allocation May Matter Most

In today's complex financial markets, there is a seemingly infinite number of investments to choose from. Each one carries a certain degree of risk, making it particularly important to select your investments wisely.

With asset allocation, you divide your portfolio among the major asset classes — equities, fixed-income securities and cash equivalents. How you choose to divide your portfolio will hinge on your time horizon and tolerance for risk and how they match up with the risks and reward potential of each asset class.

Rules of Thumb
Generally, the larger the equity portion in a portfolio, the greater the potential for growth and the more risk. On the other hand, the larger the fixed-income and cash equivalent portion in a portfolio, the lower the potential for growth but greater the potential for income and preservation of principal.

If you tolerate risk quite well and/or have a long time horizon, you may want to have a greater equity presence in your portfolio so you potentially can capitalize on long-term growth. But if you’re close to meeting your financial goals, you may want to allocate a substantial portion of your portfolio to fixed-income securities. That way, you may be able to better protect your existing assets.

Times Change, So Do Allocations
Over time, performance in one asset class may potentially skew your original allocation. In addition, you’ll probably need to change your asset allocation as you reach different stages in your life. Therefore, it is important to periodically review whether your current allocation is still coordinated with your risk tolerance and time horizons.

Regardless of the asset allocation strategy you choose and the investments you select, keep in mind that a well-crafted plan of action can help you weather all sorts of changing market conditions over the long-term. However, because your goals and circumstances are unique, be sure to speak with a financial advisor to ensure your asset allocation strategy is in concert with your objectives.

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