Asset Allocation and Diversification As Risk Management
Prudent investing is about reducing risk first. Next it is about managing profits. Nobody can be right all the time, and a disciplined attitude coupled with fundamental risk management are essential. Taking on more risk often leaves you feeling broke instead of wealthy.
Asset allocation is an investment strategy that helps balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to your risk tolerance, goals and investment timeline.
Asset allocation is based on the principle that different assets, not perfectly correlated, perform differently in different economic and market conditions. For example, a conservative portfolio may contain the following asset allocation: 40 percent corporate bonds, 10 percent treasury notes, 20 percent cash, 20 percent precious metals, 10 percent stocks. In contrast, aggressive portfolio may have 100 percent of its funds invested in stocks….
Diversifying your savings among different asset classes (cash, bonds, precious metals, etc.) decreases your risk of massive losses. Diversification as a risk management tool is extremely important for choosing the actual investment vehicles.
NEVER…EVER put all or even most of your money in any one particular investment.
If your employer offers you shares of common stock of the company as a form of retirement contribution in addition to your own retirement contributions (a good idea since your contribution is tax free), find out how you can diversify all retirement money among different investment vehicles.
More on this topic next week…
To Your Wealth, Health and Happiness,