“Don’t put all your eggs in one basket,” a saying that captures the idea of diversification perfectly. Different asset classes don’t always perform the same. Diversification is the idea that by investing in a variety of asset classes you can help insulate your portfolio from the rollercoaster ride of ups and downs because the different classes will probably not be performing the same at the same time. If you put all of your investments into one asset class, you could find yourself under pressure when volatility hits.
Keep in mind, however, that diversification is an approach to help manage investment risk. It does not eliminate the risk of loss when an investment sees a decline in price.
When financial professionals ask you questions about your goals, time horizon, and tolerance for risk, they are getting a better idea of what asset classes and asset mix may be appropriate for your situation.
Determining an Appropriate Mix
Appropriate asset allocation is determined by each individual, family, or business owner’s situation. Here are three broad factors to consider:
Investors with longer timeframes may be comfortable with investments that offer higher potential returns but also carry a higher risk. A longer timeframe may allow individuals to ride out the market’s ups and downs. An investor with a shorter timeframe may need to consider market volatility when evaluating various investment choices.
An investor with higher risk tolerance may be more willing to accept greater market volatility in the pursuit of potential returns. An investor with a lower risk tolerance may be willing to forgo some potential return in favor of investments that attempt to limit price swings.
Have Your Investing Priorities Changed?
If so, this is all the more reason to review and possibly adjust the investment mix in your portfolio. Asset allocation is a critical building block of investment portfolio creation. Having a strong knowledge of the concept may help you when considering which investments are appropriate for your long-term strategy.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.