If you live in or have visited a big city, you’ve probably come across street vendors — people selling everything from hot dogs to umbrellas — on the streets and sidewalks. Many of these entrepreneurs sell completely independent products, such as coffee and ice cream.
At first glance, this approach seems a little strange, but it turns out to be quite clever. When it’s cold, it’s easier to sell hot cups of coffee. When it’s warm, it’s easier to sell ice cream. By selling both, sellers reduce the risk of losing money on any given day.
Asset allocation applies this same concept to managing investment risk. Under this approach, investors spread their money across different asset classes, such as stocks, bonds, and cash alternatives, such as money market accounts. These asset classes have different risk profiles and potential returns.
The idea behind asset allocation is to offset losses in one class with gains in another, and thus reduce overall portfolio risk. It is important to remember that asset allocation is an approach that helps manage investment risk. It does not guarantee against investment loss
Determine the most appropriate combination
The most appropriate asset allocation will depend on individual circumstances. Among other considerations, it can be determined by two major factors.
Investors with longer maturities may be comfortable with investments that offer higher potential returns, but also carry higher risk. A longer timeframe can allow individuals to weather the ups and downs of the market. An investor with a shorter time frame may need to consider market volatility when evaluating various investment choices.
An investor with a higher risk tolerance may be more willing to accept greater market volatility in pursuit of potential returns. An investor with a low tolerance for risk may be willing to forgo potential return in favor of investments that attempt to limit price fluctuations.
Asset allocation is an essential part of creating an investment portfolio. Having a solid understanding of the concept can help you determine which investments might suit your long-term strategy.
Richard H Mootz, CFP® CERTIFIED FINANCIAL PLANNER™ Professional, is a Registered Representative and offers securities through Securities America, Inc., a Registered Dealer/Dealer, Member FINRA/SIPC., Advisory Services Provided by Securities America Advisors, Inc., an SEC-registered investment advisory firm. Mootz Financial Solutions and Securities America Companies are not affiliated.
Richard H Mootz, CFP® CERTIFIED FINANCIAL PLANNER™ Professional can be reached at (530) 877-7007 – email [email protected] or visit the website at www.mootzfinancialsolutions.com. Securities America and its advisors do not provide tax or legal advice. Please consult your tax or legal advisor regarding your personal circumstances. CA insurance number 0C75924
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