Asset Allocation

If you’re like most investors, you purchase. Proper asset allocation can have different types of assets. provide the necessary diversification to prevent your investment from Because one type of asset falling victim to the market’s short- behaves differently from another term volatility. It’s easier to go about in terms of risk and return, it’s diversifying your when you important to strategically plan first decide what percentage of each type of asset you’ll hold. Historically, what portion of your investment different asset categories perform portfolio you’ll dedicate to each differently from each other at any type of asset. given time. You are unlikely to lose your whole investment at once because one asset class doesn’t This portioning is called asset normally affect the performance of allocation. The asset allocation you another. choose for your own portfolio is a personal decision based mostly on your investment objectives and constraints, including your investment [I]n the short-term, asset allocation horizon and risk tolerance. Asset is extremely important, more so allocation is not synonymous with than which individual securities you diversification—asset allocation is the vehicle through which your portfolio purchase. David Becker can become diversified. However, you may choose to allocate your assets so that they aren’t diversified for various Types of Assets reasons. For instance, you could Northern Oak Wealth With so many different asset choose to hold 100 percent of your Management, Inc. categories, there are infinite ways to investment in —here, you have (414) 278-0590 divide your portfolio. A simplified allocated your assets but not www.northern-oak.com asset allocation might be 60 percent diversified. An undiversified portfolio 555 E. Wells St. Suite 1625 stocks, 30 percent bonds and 10 like this is not optimal because it takes Milwaukee, WI 53202 percent . But this example on too much risk, so diversification is portfolio is more complicated than an important strategy in asset that, and its assets might be allocated allocation. differently from another 60/30/10 This article was written by Advicent Why is it Important? portfolio. Stocks range in volatility Solutions, an entity unrelated to Northern from large cap value to small cap Oak Wealth Management, Inc.. The Many studies have indicated that asset growth and bonds range in maturity information contained in this article is not intended to be tax, investment, or legal allocation is the primary driver of date (short-term to long-term), so advice, and it may not be relied on for the variation for a diversified portfolio’s diversification within is purpose of avoiding any tax penalties. quarterly returns. This means that, in Northern Oak Wealth Management, Inc. also important. Investments held in does not provide tax or legal advice. You the short-term, asset allocation is “cash,” can mean money held in a are encouraged to consult with your tax extremely important, more so than advisor or attorney regarding specific tax savings account, a CD, a money issues. ©2012-2014 Advicent Solutions. All which individual securities you rights reserved. Asset Allocation market account or government bonds. your focus should be on preserving  Preservation of Capital: If you’re In addition to the three main asset your investment. nearing retirement (or if your classes, you can invest in real estate, investment is for a short-term goal),  Of the three main asset classes, commodities, precious metals, you’ll want to focus on preserving stocks are usually the riskiest, collectibles, foreign stocks, and the capital you have, rather than followed by bonds, then cash. alternative assets. Each asset class building more. These portfolios Generally, you will start out with a behaves differently and will impact have a high percentage of cash and high percentage of stocks and your portfolio differently, depending cash equivalents, with little risk. gradually transition to holding on what percentage you allocate to more bonds throughout the life of Whatever your situation—your age, them. your investment. risk tolerance, savings goals etc.— there is an asset allocation model that Things to Consider  Cash and cash equivalents are the should work for you, in theory. least risky, and many cash All investors are unique, and since However, it’s up to you and your equivalent investments are insured there are infinite ways to allocate your financial advisor to determine your by the FDIC. The main risk in this assets, your portfolio can be unique individual investing needs and type of asset is that inflation will too. That said, there are some allocate your assets accordingly. Once outpace growth. objectives and constraints to consider you’ve chosen your proper asset when choosing your investments: Asset Allocation Strategies allocation, keep in mind that you’ll  Your time horizon is important need to update it periodically as your You can shape your portfolio based on when choosing your asset needs change. This will help keep one of the four main asset allocation allocation. If you’ll need to liquidate your investments relevant to you and strategies that take into account both soon (such as if you’re saving for a keep you an informed investor. time horizon and risk tolerance. You’ll family vacation or if you’ll be need to work with a financial advisor retiring in the next few years), you’ll to personalize your portfolio, but want to minimize your exposure to these strategies are a good starting risk. If your time horizon is long (if point: you’ll be retiring in 30 years, for instance), you can tolerate higher  Growth: This model focuses on risk exposure. building long-term wealth by increasing risk exposure. You  Your risk tolerance is also would choose this asset allocation if important. Risk tolerance is your you knew you wouldn’t need access ability to lose some or all of your to your money in the near future. A investment due to market growth-focused portfolio tends to fluctuations. Your ability is invest in a high percentage of determined both by your financial stocks, which carry both high risk outlook and your emotional and high return. reaction to risk.  Income: As you get closer to  In general, riskier investments yield retirement, your investment may higher returns. need to become more conservative.  There is no perfect asset mix. You’ll be dipping into your savings There’s no way to tell what the sooner and thus have a lower perfect asset allocation will be, and tolerance for risk. These portfolios even if you could, the market is are designed to generate income always changing. from assets such as stocks that pay regular dividends.  When your portfolio is new—your investment is small and your time  Balanced: A cross between growth horizon is long—you can afford to and income is the balanced take on risk, and market volatility portfolio, which both grows and matters less. generates cash. This asset mix appeals to investors’ emotional  When your investment has grown sides and offers diversification. and/or you’ll need to liquidate soon,

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