It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.
We’ve all heard the saying, but do you apply this advice when it comes to investing? Study after study has shown that portfolios invested among different types of assets, such as equity and fixed-income investments, perform better and are less risky than portfolios that are concentrated in just one area. That’s because different asset classes typically perform differently under the same market conditions. For example, when stocks become volatile, bonds often perform better. By diversifying your investments among the various asset classes, you may be able to soften losses in one asset class with gains in another. Asset allocation – how you distribute your investments among various asset classes – is important because it allows you to diversify risk, and thus more safely seek higher potential returns. Although diversification doesn’t guarantee a profit, or protect against the risk of loss, it may be able to reduce the volatility of your portfolio.
There is no one-size-fits-all asset allocation solution. Key personal factors such as your risk tolerance, time-frame, liquidity and income needs, return expectations and tax situation must all be addressed as part of the process. The ultimate goal of your asset allocation strategy should be to build an efficient portfolio of investments that will provide you with the greatest possible return for the lowest risk while taking your particular circumstances into consideration.
Determining your asset allocation strategy is a challenging but crucial step in developing an investment portfolio that will help you achieve your financial goals. Make sure you don’t have all your eggs or too many of your eggs in the same basket.
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