When you created your investment strategy, your asset allocation should have reflected your goals, time horizon, and tolerance for risk.
But over time, any of those three factors may have changed, and your portfolio may now need adjustments to reflect your new investing priorities.
It’s important to remember that asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.
DETERMINING AN APPROPRIATE MIX.
The most appropriate asset allocation will depend on an individual’s situation. Here are the three broad factors to consider.
TIME.
Investors with longer timeframes may be comfortable with investments that offer higher potential returns but also carry a higher risk. A longer timeframe may allow individuals to ride out the market’s ups and downs. An investor with a shorter timeframe may need to consider market volatility when evaluating various investment choices.
GOALS.
They come in all shapes and sizes, and some are long-term while others have a shorter time horizon. Knowing your investing goals can help you keep on target.
RISK TOLERANCE.
An investor with higher risk tolerance may be more willing to accept greater market volatility in the pursuit of potential returns. An investor with a lower risk tolerance may be willing to forgo some potential return in favor of investments that attempt to limit price swings.
HAVE YOUR INVESTING PRIORITIES CHANGED?
If so, this is all the more reason to review and possibly adjust the investment mix in your portfolio. Asset allocation is a critical building block of investment portfolio creation. Having a strong knowledge of the concept may help you when considering which investments are appropriate for your long-term strategy.
