You’ve probably heard about the importance of investing money wisely to protect your future self and work toward long-term and short-term goals. If you wished they covered investing more in school, we’ve got your back!
One of the most important aspects of investing is asset allocation. In this Back to Basics piece, we’ll break down what it is, share more about different types of assets and share why diversifying your portfolio is important.
What is Asset Allocation?
Asset allocation describes how investors split their portfolios between different kinds of assets – stocks, bonds, real estate, and cash to name a few. This extremely personal process can help you save for the future by ensuring you’re putting your money in the right places.
Asset allocation isn’t a one-size-fits-all ordeal – the right type of assets for your portfolio is unique to you. How you divide your assets will depend on various factors, from your age to your financial goals to your own risk tolerance. It should also consider the current investment landscape and what’s on the horizon. For some investors, their personal values also come into play in the stocks or funds they choose.
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Categories of Assets
Most asset portfolios include three main categories of assets: stocks (sometimes called equities), bonds (sometimes called fixed incomes) and cash or cash equivalents. Most beginner investors think of these types of assets when it comes to building a portfolio. Other categories exist — such as real estate, precious metals and other commodities, or private equity — and these may be featured in more complex investment portfolio strategies.
Importantly, these assets behave differently and suit different goals and risk landscapes. For example, stocks can have significant risks, but great rewards. Investors may see dramatic losses at times, but for long-term financial goals, these generally yield positive returns. They’re a solid option for goals like retirement savings.
Bonds are less volatile than stocks but offer lesser returns. These are a sort of middle ground between stocks and cash or cash equivalents, which are the most stable but least fruitful. Cash and cash equivalents, unlike stocks, are excellent options for short-term goals, like home renovation or buying a car.
Diversification of Assets
Investing is too important to put all your eggs in one basket. When it comes to asset allocation, diversification is critical — both within asset categories and in the asset categories you choose.
You can think about it this way: if you visit a fair, you may come across a vendor who sells sunglasses, baseball caps, rain ponchos and umbrellas. This range of offerings better equips the vendor to make sales no matter the day’s weather. Diversification in asset allocation is the same: it’s the means to cover your bases, regardless of what the future has in store.
Diversification is not just about mixing different types of assets – it’s also considering the specific assets themselves and how it can impact the investment portfolio overall. Those building their own stock portfolio, for example, may want to consider a range of stocks, not just three or four big names. Including a variety of companies and industries can reduce the risk of seeing significant losses.
This is where personal risk tolerance and stage of life come in. Those nearing retirement may elect to use a more conservative investment approach, while someone just starting out may decide to take more risk because they have time to recoup any losses.
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Working with a Professional
Like asset allocation, the decision to invest yourself or work with a portfolio manager is personal. There are so many tools out there, but it’s recommended to also consultant a professional. Professional financial advisors and portfolio managers closely following the markets each day and have experience across life stages, economic conditions and goals. Working with one can help you find the right strategy for your personal situation and offer advice to help you reach your goals.
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Getting Started with Asset Allocation
The sooner you can get started with asset allocation, the better. Choosing your investments at a young age allows you to plan for the future, whether near or far. But if you’re starting at an older age, don’t be intimidated. Investing, in general, is a great way to safeguard your finances and reach your goals no matter where you are in your financial journey or education.
Whether you’re a beginner or considering changing your asset allocation to fit new goals, working with an expert can help you figure out the best path. You can contact our team of investment management experts to find out more and schedule a personal consultation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
