How much control do you have over your financial future? Many people think the future is out of their hands because they can’t influence how world stock and bond markets perform or how fast the U.S. economy grows.
In fact, you influence all three of the most important factors that determine how much you may have when you retire:
While most people know the importance of regular investing, they frequently
overlook the crucial role of asset allocation.
Asset allocation refers to the way you weigh investments in your portfolio to try to meet a specific objective. For instance, if your goal is to pursue growth (and you’re willing to take on market risk in order to do so), you may decide to place 20% of your assets in bonds and 80% in stocks.
The asset classes you choose, and how you weigh your investments in each, will probably depend on your investment time frame and how that matches with the risks and potential rewards of each asset class.
How do you decide the right asset allocation for your financial situation? Should you put all your assets in stocks, or maybe divide your assets evenly between stocks and bonds? Financial consultants advise that no single investment plan fits everyone. You have to determine several factors before deciding your best asset allocation.
First, consider your time horizon, your age and your goals. What are your financial objectives? What kind of investments will help you meet those objectives and reach your goals?
You must also understand your tolerance for risk. Younger investors who have time to ride out a market downturn may want to consider holding more stocks, while investors who are closer to retirement often prefer less volatile investments. If you’ll lose sleep when stock prices fluctuate, you may want to allocate your assets among several types of stocks and include bonds in your holdings.
Stocks, Bonds and Money Markets
Here’s a closer look at the risk and potential reward levels of the major asset classes:
Stocks - Well-known for fluctuating in value, stocks carry a high level of market risk (the risk that your investments’ value will decrease). However, stocks have historically earned higher returns over the long term than other asset classes, although past performance is no predictor of future results.
Bonds - In general, these securities have less severe short-term price fluctuations than stocks, and therefore offer lower market risk. On the other hand, their over all inflation risk tends to be higher than that of stocks, as their long-term return potential is also lower.
Money market instruments - Among the most stable of all asset classes in terms of returns, money market instruments carry very low market risk. At the same time, these securities don’t have the potential to outpace inflation by as wide a margin as potentially do stocks.
One guideline for asset allocation suggests that you subtract your age from 100 to determine the percentage of your assets to invest in stocks. So if you are 55 years old, you would have 45% of your assets in stocks. That may be a good starting point, but it is recommended that you meet with a financial consultant for a personal evaluation to determine what may be right for you.
Deciding how much to invest in stocks or bonds is just the first step. Next, you need to choose which types of stocks and bonds will help you work toward meeting your goals. One method used by some financial consultants is to build a pyramid, with the biggest portion in stable and conservative investments forming the base, and higher risk funds that may provide a higher return at the top.
Asset allocation is a simple concept, yet an important one. For many individual investors, the asset allocation decision amounts to choosing what types of mutual funds to invest in, and the amount to invest in each type of fund. Other investors may want to add individual securities to this mix after exploring their investment options.
Regardless of the asset allocation strategy you choose and the investments you select, keep in mind that a well-crafted plan of action over the long term can help you weather all sorts of changing market conditions as you aim to meet your investment goals.
Finally, you should review your asset allocation on an annual basis. Even though you may not change anything, it’s wise to reassess how your allocations align with your financial goals.
Asset allocation cannot eliminate risk of fluctuating prices and uncertain returns, nor can this strategy ensure profit or guarantee against loss.
Golden 1 Financial Consultants1 are experienced in helping you determine what your long-term investment objectives may be, what your level of risk tolerance is, and what types of investments are most appropriate to help you achieve your goals. Take the time to discuss your goals with your financial consultant to help you make the right decisions for your individual financial needs. Ask a Golden 1 Financial Consultant how they can help you:
Schedule a free consultation with a Golden 1 Financial Consultant by calling 1-877-GOLDEN 1, ext. 2780 (1-877-465-3361).
1 The Financial Consultants of Golden 1 Investment Services are registered representatives with LPL Financial. Securities offered through LPL Financial, Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. LPL Financial is a Registered Investment Advisor. LPL Financial is not affiliated with Golden 1 Credit Union nor Golden 1 Investment Services.
The LPL Financial registered representative associated with this site may discuss and/or transact securities business with residents of all 50 states.
2 You are advised to seek advice from your own tax professional and attorney.
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