What Is Asset Allocation?
Asset allocation is the process of developing a diversified investment portfolio by allocating investment dollars across different asset classes in varying proportions, depending on your goals and time horizon. In simple terms, it means not putting all your eggs in one basket.
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Why Is Asset Allocation Important?
It is believed that the allocation of your investment dollars has more impact on your overall investment success than anything else. The asset allocation decision is one of the most important factors in determining both performance (return) and risk (standard deviation) of an investment portfolio.
As the market fluctuates, different investment styles and classes typically don’t move in sync. Allocating your portfolio across a variety of security types, such as stocks and bonds, that act differently in given market environments can help lower the risk within your portfolio. And, by including income investments as part of your overall strategy, you may offset losses that occur in the equity market with the consistent and reliable interest or dividend payments.
There are many ways to diversify your investments. Many investment professionals recommend diversification across at least two asset classes. But you can also diversify even within a given sector. For example, if you’re primarily interested in stocks, you can invest in a stock mutual fund instead of buying individual securities. In addition, you might choose to invest in a more conservative, income-oriented stock fund as well as an aggressive, growth seeking stock fund. Mutual funds as an investment vehicle offer built-in diversification, because they invest in dozens of securities across sectors and industries.
The Benefits of Diversification*
A diversified portfolio can help reduce exposure to losses while taking advantage of potential gains.
(1) Historical stock prices have been adjusted for stock splits and stock dividends. (2) DOL Bureau of Labor Statistics: Total Private Average Hourly Earnings.
Past performance is no guarantee of future results.
This chart is for illustrative purposes only and is not representative of performance for any Huntington Fund. Actual returns and principal value will fluctuate. Typically, the higher the potential return, the higher the risk.
* Diversification does not assure a profit nor protect against loss.
Allocating Assets Appropriately
One of the most important thing you can do as an investor is to make sure your assets are allocated appropriately.
The key things that determine how your assets should be allocated are your goals, timeframe, risk tolerance, and financial situation. Your asset allocation should reflect all these factors and balance risk and return potential accordingly. Taking all these factors into consideration will help ensure that you aren’t allocating your assets too conservatively or aggressively.
As your goals, timeframe or financial situation change, so should your asset allocation. For example, as you near retirement, your assets should gradually shift to a more conservative allocation, oriented more toward capital preservation rather than growth. |
How Asset Allocation Can Change With Age
These portfolios are for illustration only and may require substantial modification based upon the individual circumstances of the investor.
These portfolios are for illustration only and may require substantial modification based upon the individual circumstances of the investor. |
Benefits of Asset Allocation Programs
Since this decision is so important, many investors rely on the guidance of an investment professional for help allocating their assets. Many financial services providers offer asset allocation programs, which are designed to help make the allocation process as convenient as possible, and offer investors the benefit of professional investment expertise in making their decisions and maintaining their allocations. Following is a list of benefits you can expect from a professional asset allocation program:
1. Personalized investment solutions built around your financial needs and goals.
An investment professional works with you to thoroughly explore all factors and determine the best allocation for pursuing your goals.
2. An actively and professionally managed account.
Once you’ve made your allocation, your investment professional should monitor the industry and tracks your allocation. He or she should check with you periodically to make sure your goals or financial situation haven’t changed and that your original allocations are still on target for helping you reach your goal(s).
3. Portfolio rebalancing.
As the various sectors experience growth surges at different times and you continue to reinvest your dividends, you may find yourself more heavily allocated in a particular sector or investment. Portfolio rebalancing automatically realigns your portfolio with your original allocations, to ensure that you don’t slide off target from your plan.
4. Strategic long-term focus.
Participating in an asset allocation program helps keep you focused on long-term goals rather than short-term market activity, which could actually improve your overall investment performance.
5. Simple methods to track progress.
6. Many asset allocation programs offer you a statement detailing the performance of the underlying investments in your allocation, which your investment professional can review with you in detail.
Asset allocation does not assure or guarantee better performance and cannot eliminate risk of investment loss.
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