You’ve heard the phrase “Don’t put all your eggs in one basket,” right? Essentially, it means that you shouldn’t focus all your efforts on one thing or in one place, or you could lose everything.
That’s particularly true when it comes to investing for your future. In the financial world, this concept is called “asset allocation.” It’s the process of dividing your investments among various asset classes, like stocks, bonds, cash and cash alternatives, and other liquid assets … and further diversifying among the various categories of those investments. Within stocks, for example, you can invest in companies that are categorized as small, mid or large size and those that are based in the U.S. or abroad.
Why is it important to divide your investments among various asset classes? Because from one year to the next, you never know which type of investment will do well. Notice how the performance of various asset classes changes over this 15-year period. While mid-cap stocks, for example, hovered near the center during that period, other swings were much more extreme. International emerging markets had some of the highest and lowest returns from one year to the next.
The bottom line? There is no way to predict the ups and downs of the market. That’s why it’s important to spread your investments across various asset classes. Of course, that means all your investments won’t be top performers every year. But they won’t all be the worst performers, either.
And while all investments carry some level of risk, asset allocation helps you spread the risk. Your asset allocation should be based on your unique circumstances, which include your goals, how much time you have to invest before the money is needed, and your tolerance for risk. Of course, over time, your circumstances may change, so you may need to adjust your asset allocation along the way.
The key is to create a combination of investments that’s right for you while not taking on too much risk ... or setting yourself up for too little reward. There are a lot of options and factors to consider when investing. That’s why it’s important to work with someone who can help ensure your investments continue to support your circumstances—and your overall financial plan—so you can stay on track to meet your goals … today, tomorrow and into the future.