What is asset allocation?
Asset allocation can be an effective way to help manage risk in your investment portfolio.
Simply put, asset allocation is a strategy that involves selecting a mix of investments appropriate to your risk tolerance, time horizon, and financial goals.
What are the most common types of investment assets?
The most common types of investment assets, or asset classes, are:
- cash equivalents;
- fixed income securities, such as bonds or bond funds;
- and equity securities, such as stocks or equity funds.
Each asset class is expected to have different levels of risk and return characteristics. So each will behave differently over time. For example, stocks are typically considered riskier than bonds, but they also offer the potential for higher returns over the long-term.
There’s no predicting how well your investments will perform or how steady your returns will be. That’s why it’s important to diversify your portfolio.
What are your asset allocation options by age as an investor?
Are you a young investor saving for retirement? Then you may have plenty of time before you're likely to withdraw the funds. So you may consider allocating more of your portfolio to equities, say maybe a split of 60% equities to 40% fixed income.
- What is ESG and is it a good option for your portfolio?
- What do you do when the stock market goes down?
Are you getting closer to retirement? Then you may want the comfort of a more income-oriented portfolio, with say, maybe only 40% equities and 60% fixed income, even if it means giving up some of the potential for higher growth in exchange for lower, steadier returns.
- How to save for a debt-free retirement
- How to keep your retirement savings on track (video)
- How big life changes can affect your retirement plan (video)
Diversifying your portfolio this way over time by increasing the fixed income allocation and decreasing the equity allocation may keep your portfolio's stable as you approach goals, such as retirement.
- To see how much you’ll have saved by the time you retire, based on your current plan, use this retirement savings calculator.
Along with asset allocation, you can further diversify your portfolio by selecting a mix of securities within each asset class. For example, there are different types of securities classified by geographical locations, industry sectors, or investment styles. And because investments within various asset classes may behave differently, a periodic review and rebalancing of your portfolio will help ensure it maintains the right asset mix based on your current circumstances.
Not sure what’s right for you?
If you need help with your finances, you may want to consider talking to an advisor.
An advisor can help you set, maintain and change an asset allocation strategy based on your risk tolerance, time horizon, and financial goals. They can also answer questions and address any concerns you may have.
- Most advisors now offer to meet Clients virtually by video chat. Find an advisor today.