Balancing the Risks of Investing
Understanding Your True Asset Mix
Over the past 20 years, asset allocation has increasingly become the foundation of individual as well as institutional investment portfolios. Yet, while many people are familiar with the concept, not all fully understand what it means to them and their investments. Asset allocation entails exchanging the potential to reap a higher return – and the risk of taking an equally dramatic loss – for the likelihood of generating a more consistent, positive return over the long term.
The general idea is that instead of devoting the bulk of your assets to a particular sector or even one specific investment, you choose different types of investments. Underlying this decision is the assumption that each asset class will react somewhat differently to a given event. For example, if interest rates rise, some asset classes should, as a whole, increase in value. Conversely, the value of some of your investments will tend to decline in the same environment – but should flourish when rates drop.
Basic Asset Classes
Depending on your appetite for risk, the economic environment, your specific investment objectives and other factors, your portfolio might include some or all of the following:
Cash and cash alternatives
If you’re primarily interested in securing a regular income, your portfolio may be heavily weighted toward fixed income. If you’re more focused on long-term appreciation, some balance of equities and other growth-oriented investments may form the core of your portfolio. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. No investment strategy can guarantee sucess.