Investment Read Time: 4 min

Asset Allocation

If you live in or have visited a big city, you’ve probably run into street vendors – people who sell everything from hot dogs to umbrellas – on the streets and sidewalks. Many of these entrepreneurs sell completely unrelated products, such as coffee and ice cream.

At first glance, this approach seems a bit odd, but it turns out to be quite clever. When the weather is cold, it’s easier to sell hot cups of coffee. When the weather is hot, it’s easier to sell ice cream. By selling both, vendors reduce the risk of losing money on any given day.

Asset Allocation

Asset allocation applies this same concept to managing investment risk. Under this approach, investors divide their money among different asset classes, such as stocks, bonds, and cash alternatives, like money market accounts. These asset classes have different risk profiles and potential returns.1

The idea behind asset allocation is to offset any losses from one class with gains in another, and thus, reduce the overall risk of the portfolio. It’s important to remember that asset allocation is an approach to help manage investment risk. It does not guarantee against investment loss.2

Determining the Most Appropriate Mix

The most appropriate asset allocation will depend on an individual’s situation. Among other considerations, it may be determined by two broad factors.

  1. Time. Investors with longer timeframes may be comfortable with investments that offer higher potential returns, but also carry a higher risk. A longer timeframe may allow individuals to ride out the market’s ups and downs. An investor with a shorter timeframe may need to consider market volatility when evaluating various investment choices.
  2. Risk tolerance. An investor with higher risk tolerance may be more willing to accept greater market volatility in the pursuit of potential returns. An investor with a lower risk tolerance may be willing to forgo some potential return in favor of investments that attempt to limit price swings.

Asset allocation is a critical building block of investment portfolio creation. Having a strong knowledge of the concept may help you when considering which investments may be appropriate for your long-term strategy.

1. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity investors will receive the interest payments due plus their original principal, barring default by the issuer. Money market funds seek to preserve the value of your investment at $1.00 a share. Money held in money market funds is not insured or guaranteed by the FDIC or any other government agency. It’s possible to lose money by investing in a money market fund. Mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
2. Investments seeking to achieve higher potential returns also involve a higher degree of risk. Past performance does not guarantee future results. Actual results will vary.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

 

Related Content

Is a SEP-IRA Right for Your Business?

Is a SEP-IRA Right for Your Business?

For some, the idea of establishing a retirement strategy evokes worries about complicated reporting and administration.

The Pre-Retirement Checklist

The Pre-Retirement Checklist

This checklist can give you a quick snapshot of how prepared you are.

IRA Withdrawals that Escape the 10% Tax Penalty

IRA Withdrawals that Escape the 10% Tax Penalty

The list of IRA withdrawals that may be taken without incurring a 10% early penalty has grown.

 

Have A Question About This Topic?







Thank you! Oops!

Red Flags for Tax Auditors

Here are six flags that may make your tax return prime for an IRS audit.

Social Media: #NewestBusinessLiabilityRisk

Social media may be a modern imperative for businesses looking to grow and build their brand, but it also introduces risk.

AI Tools Changing Retiree Entrepreneurship

The impact that Artificial Intelligence (AI) tools can have on retirees with a consulting or small business venture.

View all articles

Tax Freedom Day

Assess how many days you'll work to pay your federal tax liability.

Federal Income Tax

Use this calculator to estimate your income tax liability along with average and marginal tax rates.

Estimate Your RMD

Help determine the required minimum distribution from an IRA or other qualified retirement plan.

View all calculators

Jane Bond: Infiltrating the Market

Agent Jane Bond is on the case, cracking the code on bonds.

A Bucket Plan to Go with Your Bucket List

A bucket plan can help you be better prepared for a comfortable retirement.

The Rule of 72

Do you know how long it may take for your investments to double in value? The Rule of 72 is a quick way to figure it out.

View all videos