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Risk Management: Asset Allocation Thumbnail

Risk Management: Asset Allocation

Whether you’re planning to retire in 3 years or 30 years, your investment portfolio should be designed with your specific financial goals in mind. It should be forward-thinking enough to handle the various whims of the market but flexible enough to make necessary changes on the fly.

Asset allocation is one of the most important concepts for any investor to understand. Simply put, asset allocation describes the division of stocks, bonds, and cash that make up an investment portfolio. Although this concept is pretty straightforward, it has a considerable impact on your financial future.

Each asset class has its own particular set of risks and rewards, depending on your financial goals and time horizon. You and your trusted financial advisor may make some adjustments to your portfolio over the years as your needs change.

  • Stocks, also referred to as equities, allow you to own a share of a publicly traded company. When you invest in stocks you have the potential to get a higher return on your investment. However, if the company has a bad year, or if the economy takes an unexpected downturn, you may also lose money.1
  • Bonds have shown to be a steadier source of fixed income overall. On the flip side, bonds are subject to interest rates and inflation risks, and their rate of return tends to be lower.1
  • Mutual funds and ETFs (exchange-traded funds) are pools of multiple companies in which you can invest. While many mutual funds are a mix of stocks and bonds, some specialize in one or the other. Investing in mutual funds isn’t as risky as investing directly in stocks, because diversifying your asset allocation tends to spread the risk.1
  • Cash and cash equivalents give you flexibility in case any unexpected emergencies arise. If your air conditioner gives up, having money available to take care of it is helpful and saves you from needing to resort to a credit card However, your cash-on-hand cannot earn you money the way other investments might.1

Finding A Balance

When it comes to managing your portfolio, asset allocation requires a bit more of a hands-on approach. “Set it and forget it” may sound appealing, but changes in the market or in your personal situation warrant a review of your portfolio to ensure your asset allocation still makes sense. Working with a trusted financial advisor is a great way to make sure that your asset allocation reflects your goals, and they can help make adjustments due to any changes that life throws your way.1

  1. https://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/articles/how-to-understand-future-focused-asset-allocation