Many investment professionals believe that proper asset allocation is more important than selecting individual investments. In fact, according to a study by Ibbotson Associates, as much as 90% of the variance in investor returns may be attributed to asset allocation.
So what exactly is asset allocation? Put simply, asset allocation involves splitting an investment portfolio among asset classes, primarily stocks, bonds, and cash. These asset classes can be further broken down to encompass a number of different investments.
Each asset type responds differently to shifts in the economy and financial markets. One type may be up while another is down. Therefore, a balanced portfolio may experience less fluctuation in times of volatility in times of volatility.
Your asset allocation strategy will hinge on a number of factors, such as your age, time horizon, risk tolerance, and investment objectives. As such, you should review and update it periodically. As you get closer to your goals or experience life changes, you will likely need to adjust your asset allocation accordingly.
While asset allocation does not ensure a profit and may not protect against loss, it can play a key role in establishing a sound investment strategy and reducing risk. For assistance in developing an asset allocation strategy for your portfolio, contact a financial advisor today.
Article provided by Stephen N. Jones, CFP®, a Senior Vice President/Investments with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, who can be contacted in the Florence office at (843) 665-7599.