Juggling with fire can be dangerous. But it can be just as dangerous if you drop the ball when juggling the many financial demands on your pocketbook
Does your current asset allocation meet your needs?
Clowns juggle balls. Business executives multi-task various jobs. Parents manage numerous demands at once. The common factor between all of three of these kinds of people is that they have to deal with more than one thing or situation at a time, and as any clown, CEO, or parent will tell you, this is not necessarily easy.
Which traits do these people share that help them achieve success in their endeavors?
Diversity and Balance
Clowns, CEOs, and parents all must balance complicated demands with constantly changing circumstances. Their willingness and ability to do so contribute to their success. Similarly, when investors attempt to create winning financial portfolios, they must also look at many sides of their situation before making decisions.
Asset allocation is the art of balancing the different holdings in your portfolio. A carefully constructed financial portfolio will generally contain a mixture of stocks, bonds, mutual funds, cash, and other investments. Within each category, the assets should be diversified. For example, depending on conditions, the stock portion might contain large and small cap stocks, growth and value stocks, and shares in companies from different market sectors and geographical locations. The bond portion should also be appropriately diversified. Monitor your mutual funds to make sure the market sectors they cover don’t significantly overlap with your other holdings. And don’t overlook your cash. CDs (Certificates of Deposit in a bank) and money markets make up a well-planned cash reserve, a crucial “emergency cash” section, and a convenient location for your funds while you’re still deciding on proper investment vehicles.
Keep Abreast of Change
The proper allocation model varies depending on your age, investment goals, time frame and risk tolerance. Speak to a qualified financial advisor to help you determine what a suitable allocation model for you might be. Once you’ve diversified your holdings within the model, don’t think that your job is done ... it’s just started. When your assets are appropriately in place, you need to ensure that they stay current with your situation. The market is a turbulent environment. Watch to see how your portfolio weathers economic movements. And be aware that even a well-planned portfolio may tilt off balance if your life situation changes, your investing time frame shrinks, or the size of your nest egg grows.
To find out more about diversifying your portfolio, read Risk Tolerance and the Art of Tactical Asset Allocation.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.