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Asset Allocation 101

We’ve all heard the saying, “Don’t put your eggs in one basket.” These words are especially true when it comes to your investment assets.

Most professionals agree that asset allocation is one of the most important decisions an investor can make. A good allocation can protect some assets when markets are volatile. And, no matter how well your portfolio is performing, you don’t want to run the risk of a shaky market ruining your investments.

Consider the following tips to help find the perfect risk-reward balance to build a strong yet diverse portfolio:

  • Take Inventory of Your Current Assets: With the markets constantly changing, it’s easy to lose track of where your current assets are invested and how those sectors are performing. Designate some time to isolate your assets and measure each sector’s performance. Are most of your assets in the same class of stocks with very little in bonds, or vice-versa? If that’s the case, it may be time to diversify.
  • Determine Your Financial Goals: What are your short-term and long-term goals? Are you saving for a down payment on a house? Are you planning to retire in the next five years, or will you be working for another 20 years? What type of lifestyle do you want to live during retirement and how much will that cost? Answering these questions and more are essential when building a custom portfolio to your goals.
  • Do Your Research: Now that your financial goals are settled, it’s time to figure out what type of investor you are. Are you risk-averse or would you be willing to take on more risk with the potential for greater returns? Financial professionals and online tools can help determine what type of investor you are, which will help guide you to create a diverse portfolio that can best withstand market volatility.
  • Diversify: Finally, it’s time to decide where you want to allocate your assets. A mixture of US and global stocks—small, mid and large caps, alternative assets such as real estate and private equity—government and corporate bonds and cash can help you strike the perfect balance of risk and reward in your portfolio.

With variety of stocks, bonds, mutual funds and alternative holdings, it can be overwhelming to choose the investments that fit your specific needs, especially in a volatile market. As always, a CERTIFIED FINANCIAL PLANNER™ professional is skilled in understanding the ever-changing marketplace and can help you create a balanced and diverse portfolio tailored to your financial situation.

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Asset Allocation