Asset Allocation

Choosing the right mix for your long-term investments is the single most important aspect of a solid investment strategy. Whether you are just starting out at your first job, buying your first home, or getting ready to retire, asset allocation should be the cornerstone of your investment discipline. This is because asset allocation takes into account four important factors:

• your emotional response to changes in the stock market,
• your investing time horizon,
• your investing goals,
• as well as other important aspects of your personal situation.

The reason asset allocation is so important to an investment strategy is because it helps determine how much risk you are taking with your investments as well as potential return. By diversifying across asset classes you can take advantage of the asset class that is currently in favor and, at the same time, guard against loss when that same asset class goes out of favor. More simply, you are hedging your bets.

As you can see from the chart below, the asset classes that have been in favor over the past 20 years from 1985 to 2004, have changed dramatically from year to year. It is nearly impossible to predict which asset class will perform the best for each year, so it’s important to diversify your investments so that you can take advantage of the all the ups and downs in the market.

Diversification Ensures Participation in Changing Market Leadership

Asset Allocation Models

The three following asset allocation models give you a guide for different risk levels and time horizons. These models are designed to be a guide for an asset allocation strategy, and may not address all the needs of your specific situation, so please consult an adviser before investing.

Here are the broad definitions of each of the major asset classes in these asset allocation models:

Bond Funds: generally more stable and can provide more income than stocks, but provide less long-term return potential than stocks.

Money Market Funds: Provide income with little volatility, but offer very limited growth potential. Best if you need investments with lots of liquidity.

Stock Funds: Can be volatile in the short-term, but have historically provided more growth potential in the long-term. This category includes all types of stocks including U.S., international, and small-cap.

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Conservative Growth & Income: designed to realize primarily income and modest capital appreciation. This allocation is best for people who are currently in retirement and want to focus on stability and income. Not a good choice for investors looking for growth potential.

Investing Objective: Good option for those focused on the income that investing can provide, but not averse to growing income when possible.

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Growth: designed to realize primarily capital appreciation with a modest income component. The “growth” portfolio is good for investors who have a longer amount of time to invest and can withstand some volatility in the market.

Investing Objective: Good for investors who have a major purchase in mind, such as buying a home. Retirement and wealth building are also two good objectives for growth- oriented investors.

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Aggressive Growth: designed to realize capital appreciation. The aggressive portfolio is designed for the investor who has long-term objectives, a longer time horizon and a high tolerance for market volatility. Concentrated mostly in stocks, this portfolio uses bonds to balance risk a little, but strives for return overall.

Investing Objective: Similar to the “Growth” portfolio, the “Aggressive Growth” portfolio is good for investors with longer-term goals, such as building wealth or retirement investing. This portfolio is riskier, and is appropriate for those who can afford and emotionally withstand swings in the market.

All of these allocations can be used during a lifetime of investing. As your needs change, so should your asset allocation. Remember, these are just general guidelines, and to create an asset allocation strategy, you should take into consideration all aspects of your financial situation.