Successful Investing - Key #3
Asset allocation: spreading the wealth
Asset allocation is the process by which you spread your investment dollars over several categories of assets, usually referred to as asset classes. These classes include stocks, bonds, cash (and equivalents), real estate, precious metals, collectibles, and insurance products.
For many average investors, the focus is almost entirely on stocks, bonds (or mutual funds of stocks and bonds), and cash. You'll therefore also see the term asset classes used to refer to subcategories of these investments, such as aggressive growth stocks, long-term growth stocks, international stocks, government bonds (U.S., state, and local), high-quality corporate bonds, low-quality corporate bonds, and tax-free municipal bonds.
There are two main reasons why asset allocation is important. First, the mix of asset classes you own is a large factor--some say the biggest by far--in determining your overall investment portfolio performance. In other words, the basic decision to divide your money 80 percent in stocks and 20 percent in bonds is probably more important than your subsequent decisions over exactly which companies to invest in, for example.
Second, by dividing your investment dollars among asset classes that do not respond to the same market forces in the same way at the same time, you can minimize the effects of market volatility while maximizing your chances of return in the long term. Ideally, if your investments in one class are performing poorly, you will have assets in another class doing well. The gains in the latter will offset the losses in the former, minimizing the overall effect on your portfolio.
Investment Planning throughout Retirement...
