Asset allocation 101
Every investor has distinct needs when it comes to building a financial strategy. This means that there’s not one singular, surefire formula investors can follow to create a plan that meets their specific objectives. Every situation is unique and subject to change over time. For that reason, it’s important to recognize that building solutions to meet both short- and long-term goals is a continuous process.
One of the most important factors in determining how an investment performs over time is asset allocation. To that end, investors who are interested in creating an asset allocation plan that matches their risk tolerance and investment goals can benefit from working with an experienced financial services provider where investors have access to professionals with years of experience and a commitment to thorough and thoughtful analysis in creating custom-tailored solutions.
A guide to asset allocation
But what is asset allocation exactly? According to the U.S. Securities and Exchange Commission‡, it entails sectioning off an investment portfolio among different asset classes such as stocks, bonds and cash in order to manage risk and add diversification to a portfolio. Basically, asset allocation helps investors avoid placing all of their eggs in one basket. The way you decide to diversify your assets is based on personal preference, life stage, time horizon and risk tolerance. The method by which you allocate assets will shift over time as markets move and your goals and objectives change.
It is important for investors to always be mindful of the balance between risk and reward when it comes to investing. For example, an aggressive investor may be more willing to accept greater short-term fluctuations in their investments in return for a more rewarding end result in the long-run. These investors typically have a higher percentage of assets invested in stocks and stock funds. Conservative investors may prefer investments that protect their initial stake, although such investments are less likely to provide a substantial long-term return. Certificates of deposit, money market accounts‡ and high quality bonds or short-term bond funds are a few investments that are typically associated with lower risk. Exchange Traded Funds and Mutual funds‡ are pooled investment vehicles that are easy and cost efficient ways to diversify a portfolio without buying small positions in many single securities.
In the end, a well thought out, diversified portfolio can help investors manage risk while utilizing investments that work with their time horizon and investment objective. Once this has been established, asset allocation should continually be reviewed to ensure it is both meeting the individual’s needs and providing financial peace of mind.
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Mr. Filing is a Vice President and Portfolio Manager for UMB Private Wealth Management. He is responsible for all aspects of portfolio construction, including asset allocation, security selection and mutual fund analysis for high-net-worth clients. He joined UMB in 2013 and has 15 years of experience in the financial services industry. Mr. Filing is a Certified Financial Planner® and Chartered Financial Consultant®.