Sometimes you spend sleepless nights worrying about which stocks to buy and which to sell, which funds to own and which to dump and whether to get into bonds.
All of these are legitimate concerns, but the greatest determinant of your success as an investor will not be your sagacity in selecting specific stocks, bonds or funds for your portfolio.
No, it will be your asset allocation. That is, the way you slice up your portfolio into broad categories of, say, large-cap growth stocks and value stocks and triple A bonds and so on.
There are many opportunities available to today's investor. Taking advantage of these opportunities by strategically distributing your money in a number of different instruments can protect your portfolio and improve your chances of achieving a desired return.
It is important for investors to understand that diversification in building a balanced portfolio helps reduce risk and improve returns.
Asset allocation is yet another way to diversify. It takes advantage of the fact that when it comes to risk and reward, financial categories like stocks, bonds and money-market (cash equivalent) accounts all behave quite differently!
Stocks, for instance, offer the highest returns among those three "asset classes," but they also carry the highest risk of losses.
Bonds aren't so lucrative, but they offer a lot more stability than stocks.
Money-Market returns are puny, but you'll never lose your initial investment.
An asset-allocation strategy looks at your particular goals and circumstances and determines what asset mix gives you the optimal blend of risk and reward.
Asset allocation is a process that you re-visit again and again as you continue to build your portfolio throughout your life. Learn to identify the events that can indicate a period of re-evaluation of your asset allocation!
Chances are that, over time, the value of your investments in stocks will grow more quickly than that of your investments in bonds and cash equivalents.
Eventually you will likely have a larger percentage of your money invested in stocks than your original strategy recommended.
When this situation occurs, your portfolio could be exposed to more risk.
To help ensure that your assets are invested appropriately ...
Periodically you do have to rebalance your investments!