BEGINNERS’ GUIDE TO ASSET ALLOCATION AND DIVERSIFICATION
If you are new to investing or an veteran, you already know some of the most fundamental principles of investing. You did it through ordinary, real-life experiences.
Example, a street vendor sells what appears to be unrelated products: umbrellas and sunglasses? Seem odd? Not really. When would a buyer purchase both at the same time? Not very often because the seller knows when it’s raining you buy umbrellas but maybe not sunglasses. When it’s sunny, you buy sunglasses (maybe umbrellas too). But by selling both you have diversified their product line.
If our can understand this concept you are on your way to understanding asset allocation and diversification. Let’s look at Asset Allocation.
Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. Asset allocation works best when you clearly define your time horizon and your tolerance to risk.
Your time horizon is the day you start investing. It ends when you retire and stop investing. The longer your time horizon the more risks you can take. An investor saving for retirement later in life will take less risk because of a shorter time horizon.
Asset Allocation is where you have an array of investment products: stocks and bond mutual funds, lifecycle funds, exchange-traded funds, money market funds, and U.S. Treasury securities.
Mixing up stocks, bonds is a good strategy.
To get started determine an asset allocation model that fits your financial goals.
Diversification means the old adage: “don’t put all your eggs in one basket.” One way of diversifying your investment portfolio is to identify and invest in a wide range of companies and industry sectors. Whether you’re investing in Mutual Funds, Index Funds, Exchange Traded Funds or just old fashion stock picking, you need to spread these assets out to lower risk.
To see the Pie Charts of the three Asset Allocation and Diversification strategies: Growth, Moderate and Conservative you are going to have to read my book, “A Beginners Guide to Wealth Building- Defined Contribution Plans.
Rebalance your portfolio every year. Over time some of your investments may grow out of your asset allocation/diversification goals. As you grow older your portfolio will change from Asset Appreciation to and Asset Preservation. Read my book for more details. As always seek professional guidance when needed.
Until tomorrow, Love hugs,
Robert L. Woods (a.k.a. R. LaMont W.)