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| Explore Asset Allocation Diversifying your money among different types of investment options is one of the most basic principles of investing . It helps reduce risk by spreading your money over a number and variety of investments. It’s the basic principle illustrated by the saying "don’t put all your eggs in one basket." A diversified portfolio typically has a mix of stocks, bonds, real estate and cash, also called asset classes. Asset allocation is the process of dividing your money among different investments to help find the optimal combination of asset classes to balance your expectations for returns with your concerns about risk. It puts the principle of diversification to work so that when some asset classes are experiencing a downturn, others may be experiencing stronger performance. Asset allocation helps you: Diversify your holdings—The advantage of diversifying investments is that each type of asset reacts to the ups and downs of the economy differently. So by diversifying you help reduce the risk and volatility of your portfolio. Balance risk and reward—If your only goal is to eliminate risk, you can put your money in a savings account. But the purpose of investing is to increase the value of your assets which means you may need to take on additional risk. Asset allocation helps you manage risk while attempting to maximize future returns. Plan for the long term—One of the biggest mistakes you can make as an investor is to focus on the short term or to worry about the day-to-day fluctuations in the stock market. Asset allocation helps you plan for your important long-term goals with a long-term strategy. Although asset allocation programs are intended to mitigate investment risk, there is still a risk that investing pursuant to a model will lose value. |
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