Balancing Risk and Potential Reward

Consider an asset allocation plan.

While some believe they can achieve investment success by buying and selling hot stocks at exactly the right time, for many investors, the biggest factor in determining long term investment success has been asset allocation. Simply stated, asset allocation is investing your money in different categories of assets – typically stocks, bonds and cash equivalents – so your investments are well diversified. Ultimately, the objective of a good asset allocation strategy is to develop an investment portfolio that will help you reach your financial objectives with the degree of risk you find comfortable.

Asset allocation can help you:

  • Reduce risk. Portfolio diversification may reduce the amount of volatility you experience by simultaneously spreading market risk across many different asset classes.
  • Improve your opportunity to earn more consistent returns over time. By investing in several asset classes, you may improve your chances of participating in market gains and lessen the impact of poor-performing asset categories on your overall portfolio returns.
  • Stay focused on your goals. A well-allocated portfolio alleviates the need to constantly adjust investment positions to chase market trends, and can help reduce the urge to buy or sell in response to the market’s short-term ups and downs.

You should note, however, while an asset allocation plan can be a valuable tool, diversification and asset allocation do not guarantee a profit or protect against a loss. All investments involve risks, including possible loss of principal. Typically, the greater the potential return, the more risk involved.