The Secret of Your Success: Asset Allocation

Creating an asset allocation strategy can help you focus your financial efforts more easily by taking into consideration your time horizon, objectives and attitude toward risk. With this information, we can craft your portfolio and weight the various asset classes according to your needs to meet your goals.

Asset allocation decisions are among the most important that you will make. Studies have shown that asset allocation is responsible for as much as 90% of the variability of long-term returns produced by professional portfolio managers. When determining how to allocate your portfolio, consider the following asset classes:

• Stocks carry a high level of risk because their value can decline in the short term.  However, in the long term, stocks historically have outpaced inflation and have produced higher results than other types of assets.
• Bonds typically have less short-term risk than stocks because they experience fewer price fluctuations. Over the long term, bonds typically produce lower returns in comparison with stocks.
• Stable value investments carry very low risk and are considered among the most stable of all asset classes. They do not have the same potential that stocks do to outpace inflation over the long term.

How Can Asset Allocation Work for My Particular Situation?

Investors typically allocate their assets differently depending on age, risk tolerance and life circumstances.

For example, a 35-year-old working woman planning to retire in 30 years may construct her portfolio with 80% stocks and 20% bonds. She will have years to ride out fluctuations in the stock market, but also is potentially reducing short-term risk by including bonds in her portfolio.

When she reaches age 55, this investor may decide to focus less on growth and more on preserving assets in anticipation of retirement. She may rebalance her portfolio and allocate more of her assets to bonds and stable value investments. When this investor actually retires, she may shift a percentage of her assets from stable value investments to dividend-paying stocks to earn income.

The basic premise of asset allocation is that by diversifying your investments over a number of different assets and asset classes, you can reduce the risk of the entire portfolio while maintaining your desired long-term return rate expectations. Over the long term, an appropriate asset allocation (what to buy) is more important than when to buy. Generally, a decline in one asset class can be offset by an increase in another. Your choice of individual investments can also reduce the risk of your portfolio.

When Should I Review My Financial Plan? 

Answer is . . . .  at least Annually.

Life brings many changes —such as marriage, the birth of a child, divorce, or retirement to name a few — and these events can bring changes to your financial picture.  As life changes, it is important to review your financial plan on an annual basis.  So don't be confused by the wealth of choices available within your retirement plan or your overall investment portfolio. Creating an asset allocation strategy can help you focus your efforts and meet your objectives in the years ahead.