According to a study by Ibbotson Associates, as much as 90% of the variance in an investor’s total returns may be attributed to asset allocation. During times of market volatility, many investors who had prospered in a decade of upswing for their growth stocks may wish they had paid a little more attention to asset allocation. So what exactly is asset allocation, you ask?
Asset allocation is the process of deciding what percentage of your money to put into three major asset classes: stocks, bonds, and cash. Such classes can be further defined in terms of market capitalization, style (value or growth investments), and international or domestic securities. While asset allocation does not ensure a profit and may not protect against loss, by balancing your risk and returns over several asset classes and investment types, you may experience less fluctuation in the value of your portfolio.
This means in times of market volatility, your overall financial outlook doesn’t have to be hit quite as hard. Asset allocation is important in not only your stock portfolio, but in all your investments, such as 401(k)s, IRAs, and college savings plans. When determining what allocation is right for you, it is important to examine factors such as age, goals, current and future income, and your personal tolerance for risk.
As you age and have changes in your life, these factors may change, so it important to re-evaluate your allocation periodically. Article provided by John Brand, a Financial Advisor with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, who can be contacted in the Florence office at (843) 665-7599.