What You Should Know About Asset Allocation
There are many avenues to investing, and choosing the right one for you can make or break your ability to gain wealth. Those new to investing may feel as though they know nothing about stocks, bonds, or other types of asset allocation, but the truth is you learn the basic principles in your everyday life. Have you ever noticed that street vendors sell products that have seemingly nothing to do with each other? For example, they may sell both sunglasses and ponchos. These two things most likely aren’t going to be purchased or used at the same time, but that is the whole reason for offering both. Regardless of the weather, the vendor is going to make money. The same principle applies to asset allocation and wealth building, the more avenues one has to make money, probability shows you’re more likely to do so.
What is Asset Allocation?
Asset allocation, in simple terms, is the division of your assets, typically into stocks, bonds, or cash. This division is typically done on a percentage basis and the portion of your assets that go to a specific avenue will drastically change over the course of your life. Deciding what money to allocate where is a very personal decision, and a lot of it depends on what you’re willing to risk versus what you’re looking to be your reward.
Types of Asset Allocation
While we cannot recommend a specific type of investment to you without knowing your situation, there are many opportunities available to you in regards to investing.
Stocks
Stocks are the most commonly thought of type of investment in the general public. When you invest in stocks, you become a partial owner of a particular corporation. You purchase a share, or multiple share, in a company and whether you lose or make money depends on the success or failure of that company, the type of stock you own, and the overall stock market. The goal of a stock is to buy low and sell high, and although one of the more risky asset allocation types, can give you the largest reward.
Bonds
Bonds are loans an investor makes to an organization, such as a corporation, government, or federal agency in exchange for interest payments over a specified term as well as the principal repayment at maturity. The variety of bonds is much greater than stocks, and you can choose between treasury bonds, agency bonds, corporate bonds, and many other types of bonds. The maturity date for bonds is typically set at the purchase point, and they can be short-, medium-, or long-term bonds, usually ranging from one to 30 years until maturity. Bonds run a lower risk than stocks, but also off a much lower return. While there are bonds that can offer a higher return, they are still high-risk.
Cash & Cash Equivalents
Savings deposits, treasury bills, and money market funds are all types of cash and cash equivalents. These are the safest investments, but offer the lowest return of the three main asset allocation opportunities. The chances of losing money in cash or cash equivalents are very low, because the government guarantees many of these allocation types. The main concern for those investing in cash and cash equivalents is inflation, and the risk that it will outpace their investments over time.
Why is Asset Allocation Important?
By diversifying your investment portfolio you can protect your assets from significant losses. Historically, the three main types of asset allocation have not fluctuated the same way at the same time. While not impossible, it is very unlikely that you will see a significant loss in all three categories at the same time. Oftentimes, the success of one category requires the market conditions to be poor for another, so while one category will succeed, the other will fall. By allocating your assets, you are in a position to counteract any of those losses or gains.
How Should I Diversify My Portfolio?
While allocating your assets is a personal decision, an experienced financial professional can guide you through the process and help you make decisions based on your financial goals. Be prepared to have a candid conversation about what you are comfortable with investment-wise and what your expectations are for the financial professional you’re working with. The more they can learn about you and your goals, the more able they will be to help you grow and maintain your wealth.
Contact Carty & Co.
If you need more guidance or suggestions on your personal asset portfolio, contact Carty & Co.’s experienced financial professionals. Call us today and speak with a member of our knowledgeable, experienced staff about your financial goals.
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