Asset Allocation: what it is, how it works
The goal of asset allocation is to help cushion your portfolio against volatility in any one specific area in the short term and to provide growth potential over the long term. You may not earn the absolute maximum return, but, over time, you should experience lower volatility when any one segment of the market hits a rough patch.
Asset allocation is the process of dividing your investment dollars among different types of investments to:

1) allocate them in proportions that reflect your goals, risk tolerance and time horizon. Simply dividing your money among any three or four funds doesn’t fit the bill. Each fund must represent something really different. And its proportions must be right for your personal situation.

2) gain exposure to different asset classes to help reduce the overall volatility in your portfolio.

What happened?
So, what happened in 2008? Where was asset allocation when the stock and bond markets, both domestic and foreign, took a deep dive and it seemed like there was
no place to hide? It was doing its job. A financial crisis of historic proportions, coupled with a global economic downturn, conspired to drive stock prices down in virtually all markets and all economic sectors. Then, in 2009, a recovering market caused just about every asset class to have positive returns, as can be seen in the chart below.

Here’s the point: Asset allocation isn’t magic. It can’t produce returns when the markets don’t provide them. And it can’t do its job over the long term if you don’t stay the course. And that brings us to another thing that happened in 2007 and 2008: many nervous investors abandoned their asset allocation plans at just the wrong time. They took losses in the stock market downturn and missed out on one of the most spectacular recoveries in stock and bond market history.

Remember, asset allocation is a long-term strategy. It isn’t what happens in one, two or three years that determines your investment success. It’s the results you achieve after 10, 20 and 30 years that really matter.

A second look at your asset allocation
With the economy on the mend and the markets on the rise, it may be time to revisit asset allocation with your financial professional. Your financial professional can help you find the right balance between risk and return potential — and the right stuff for your personal portfolio.

1 International is represented by the MSCI EAFE Index, an unmanaged index of stocks of foreign companies in Europe, Australia and the Far East. U.S. Real Estate is represented by FTSE NAREIT Equity REITs, an index of ownership, disposure and development of income-producing real estate in the United States. The S&P 500 Index is an unmanaged index that includes 500 widely traded stocks. Global Bonds are represented by the Morningstar World Bond Category. U.S. Bonds are represented by the Barclay’s Capital U.S. Aggregate Bond Index, an unmanaged index of dollar-denominated and nonconvertible investment-grade debt issues. It is not possible to invest directly in an index.

For more information on any of this issue's articles, contact your financial adviser.

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