Augusta, GA — With Easter just a few short weeks away, it seems like discussing the old saying of not putting all of your eggs in one basket made sense. In the financial world, words like assets allocation and diversification are used to describe this, but the idea is the same: if you have too many eggs (or candy) in one basket or if you have too much money in one investment, you could have some problems!
Asset allocation is one of the first steps in creating a diversified investment portfolio. Asset allocation means deciding how your investment dollars should be allocated among broad investment classes, such as stocks, bonds, and cash alternatives. Rather than focusing on individual investments (such as which company’s stock to buy), asset allocation approaches diversification from a more general viewpoint. For example, what percentage of your portfolio should be in stocks? The underlying principle is that different classes of investments have shown different rates of return and levels of price volatility over time. Also, since different asset classes often respond differently to the same news, your stocks may go down while your bonds go up, or vice versa. Though neither diversification nor asset allocation can guarantee a profit or ensure against a potential loss, diversifying your investments over various asset classes can help you try to minimize volatility and maximize potential return.
Diversification is not limited to asset allocation, either. Even within an investment class, different investments may offer different levels of volatility and potential return. For example, with the stock portion of your portfolio, you might choose to balance higher-volatility stocks with those that have historically been more stable.
So, how do you choose the mix that is right for you? Countless resources are available to assist you, including interactive tools and sample allocation models. Most of these take into account a number of variables in suggesting an asset allocation strategy. Some of those factors are objective (e.g., your age, your financial resources, your time frame for investing, and your investment objectives). Others are more subjective, such as your tolerance for risk or your outlook on the economy. Financial professionals can help you tailor an allocation mix to your needs.
If you would like to review your current asset allocation or review how diversified you are, feel free to call the Fehrman Investment Group office for a complimentary meeting to make sure you have your eggs in the right baskets.