An Asset Allocation Plan Can Be Conservative or Aggressive Depending on Your Specific Circumstances
If the future were certain, there would be no need for asset allocation, investment portfolios or even investment advisors. If the future were certain, there would be no risk.
Asset allocation is a means of achieving your investment goals in an uncertain environment. The asset allocation process involves dividing your investment dollars among stocks, bonds, and money market instruments or securities so that your investment portfolio helps you achieve your financial goals. The specific mix you decide on will be influenced by your long-term and short-term needs, your return expectations, and your tolerance for risk.
Within these categories, you can further refine your choices to achieve even greater diversification, allocating your assets among different types of stocks (such as large-company stocks or small-company stocks) and bonds (such as government, corporate, or municipal bonds).
Why Is It So Important?
Many experts advocate that asset allocation not market timing and not security selection is the single most important factor in determining long-term investment success. In fact, commonly cited research has shown that asset allocation accounted for more than 90% of an investor's return over time.
How Does It Work?
It is based on what makes sense for you. Asset allocation serves a practical purpose: it gives you a game plan for deploying your investment dollars, given your unique goals and preferences. Done properly, it reflects your own unique situation and fits your circumstances like a glove. The information which follows further describes the most important considerations:
- Investment Goals. Your asset allocation strategy should reflect the nature of your financial goals and your dreams for the future.
- Time Horizon. How you allocate your assets may depend in part on how soon you will be needing your money. Investors who expect to need their money within the next five years (for retirement, for example) will certainly want to invest a greater portion of their assets in safer, more stable investment choices. Those with many years until retirement may wish to allocate a larger share of their money to more aggressive investments, such as stocks.
- Risk Tolerance. Some investors are perfectly comfortable with the up-and-down nature of the financial markets; others find it unnerving. You can adjust your asset allocation until you find a mix of investments you can be comfortable owning.
Solomon Asset Management can help you define your goals, time horizons, and tolerance for risk, and then help you to select an appropriate mix of investments.