Allocating Assets

Your personal finances -> Learn to be true investor

The recipe for making the most of your investments calls for measuring your ingredients carefully.

One strategic approach to investing is to buy a combination of investments that you believe have the strongest potential to provide the return you are seeking at a level of risk that you are willing to take. The process of creating such a portfolio is known as asset allocation.

The reason that asset allocation can help is that each asset class, or investment category, tends to perform differently in different economic conditions. For example, when stocks are providing a strong return, cash returns are often small. And when investors are buying bonds, stock prices tend to slide.

If you are invested in stocks, bonds, and cash over a period of time, you will be in a better position to avoid the level of loss you would suffer in a stock downturn if you owned only stocks, or in a bond downturn if you owned only bonds.

Allocation Models - Asset allocation plans, or models, tend to focus, for the most part, on securities - stocks and bonds and the mutual funds that invest in stocks and bonds - and on cash or its equivalents - investments which can be easily liquidated at little or no loss of value, like CDs and US Treasury bills.

Brokerage firms and individual financial advisers regularly revise and refine the allocation models they are suggesting to their clients to take current economic conditions as well as individual investment goals and risk tolerance into account. Whether you stick to an allocation model you've selected or revise your allocation from time to time is another decision you'll have to make.

There are a growing number of computer programs and financial websites to help you analyze your investments and keep track of how they are performing. Some are comprehensive tools that incorporate advice with background information and work charts.

Mutual fund companies and brokerage firms are among the sources. So are companies whose websites specialize in a specific area, such as retirement planning, or those that concentrate on strategic asset allocation.

You can find articles about what is available in the financial press and personal finance magazines, use a search engine, or ask for a reference from your friends, family, or professional advisers.
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