The Importance of Asset Allocation: Finding the Right Investment Mix for Your Account

2013 has been an excellent year so far for investors, with the S&P 500 up over 23% and the Dow Jones up nearly 19% as of the end of October. Despite this outstanding performance, we have also seen periods of significant volatility this year and over the past several years since the beginning of the “Great Recession.” Most recently, the government shutdown, talk of an end of the Federal Reserve’s stimulus program, and concern about rising interest rates have caused volatility in both the equity and bond markets during the past few months. These periods of volatility can cause significant concern in investors, and highlight the importance of a basic investing concept: Asset Allocation.

Asset Allocation is the mix of stocks, bonds, and cash equivalents in an investment account. The mix is determined through an evaluation of an investor’s goals, tolerance for risk, and investment time length. The goal of the process is to determine the appropriate percentage to be allocated to each of these asset classes to balance the amount of risk that an investor is willing to take with the return potential of the portfolio.

More simply stated, an investor’s asset allocation should provide the investor with an investment mix that provides investment returns with a level of risk and fluctuation that you are comfortable with. For example, an investor who is uncomfortable with large declines in their portfolio’s value should have an allocation with a significant percentage of investments in less-volatile bond investments rather than the more risky and volatile equity investments. Alternately, an investor who is comfortable with such fluctuations may have a larger allocation to stocks in their accounts.

Having the proper asset allocation in your accounts can provide some peace of mind for you as an investor. If your investment mix provides returns with fluctuations that you are comfortable with, you should have less concern during short-term periods of volatility that are almost certain to happen over the course of a year.

If you are unsure about what the right asset mix is in your own accounts or if you have been uncomfortable with the up and down volatility in your portfolio when you’ve opened your account statements this year, it is a good idea to discuss this concept with your Wealth Manager or Financial Advisor. Year-end is a good time to review your goals and investment mix to ensure that your current portfolio is right for you.

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