ASSET ALLOCATION
No one investment—or even group of investments—is right for everyone. The mix of investments you choose for your portfolio should be based on your financial objectives, investment time frame, current financial situation, financial expertise and tolerance for risk.
What Drives Long-Term Investment Performance?
Asset allocation may be a key to long-term investment performance. Since the asset allocation process has been shown to be responsible for more that 91% of investment performance1, we believe it's critical to assemble your portfolio with care. Other factors, such as market timing and security selection, appear to have a minimal impact on the performance of your portfolio in comparison to asset allocation.
Putting Together a Powerful Portfolio
Allocating your assets appropriately means selecting the right balance of investments to fit your goals, risk tolerance and time horizon. When your investments are diversified, or spread across different asset classes, such a stocks, bonds, or money market accounts, they may work together to reduce risk.
Most investment professionals recommend that investors combine growth-oriented investments like stocks or stock funds with the potentially more stable, fixed-income investments like bonds and money market accounts to help potentially reduce risk and increase growth potential.
Balancing Risk and Reward in Your Portfolio
The way you combine asset classes can have a considerable impact on the risk/reward profile of your investment portfolio. The more investment risk you are willing to accept, the greater potential for reward. Investments that offer higher return potential are generally more volatile over shorter periods, but this volatility has historically smoothed out over time. So, the longer your investment horizon, the more risk you may be willing to take.
Stocks Have Historically Outpaced Other Asset Classes
Of all the major asset classes, stocks carry the most risk to your original investment. This is because the value of a stock may fluctuate sharply over short periods. Though many investors are hesitant to expose their assets to the potential volatility of the market, setbacks have proven, historically, to be temporary dips. Since 1925, stocks as measured by the S&P 500 index, have not only grown in value, but have outperformed other investments such as corporate and government bonds and Treasury bills. Of course, past performance is not a guarantee of future performance.
The Longer Your Investment Horizon, the Lower Your Potential Risk
The history of the stock market shows that those who remained invested over a long period, regardless of how the market (S&P 500) was performing at any given time, did better than those who tried to time the market. Based on historical stock market performance, if you had held stocks for just one year (any random year since 1920 as represented by the S&P 500), you would have achieved a positive return only 73% of the time. If, on the other hand, you had held them for any 15-year period, you would have had positive results 100% of the time.2
While stocks generally have a greater potential return than bonds or Treasury Bills, they involve a higher degree of risk. Treasury Bills, unlike stocks, are guaranteed as to payment of principal and interest by the U.S. government.
Combining Stock Styles to Weather Most Investment Climates
One strategy for riding out the potential volatility of the market is to combine different stock syles—value and growth—in your portfolio. Value and growth are two stock investment styles that seek to provide total returns higher than the market average.
- Value stocks are considered to be priced below their "true" value
- Growth stocks tend to be represented by companies with historical above-average earning growth rates
Historically, each style has moved in and out of favor in different cycles. However, over time, the average returns of the two styles have been similar.
Cushioning Portfolio Volatility with Bonds
With your asset allocation strategy in mind, bonds may be a way to help to offset the potential risks associated with stocks. A bond is an investment through which you lend money to a company, the U.S. government or a government agency. The issuer of the bond agrees to pay back the loan by a certain date and make regular interest payments along the way, based on the paying ability of the issuer.
The regular income and relative stability of bond returns may offset some volatility of a stock portfolio.
A Mix of Stocks and Bonds May Smooth Out the Ride
A mix of stocks and bonds in your portfolio may smooth out a potentially volatile market. When the market is up, you may not need to rely on the performance of a bond portfolio. However, historically, bonds have cushioned performance during fluctuating periods for stocks. By adding a bond component to your portfolio, you can potentially protect yourself from unexpected dips in the market.
Instant Diversification with Mutual Funds
For millions of investors, mutual funds have become the most convenient and affordable way to obtain the benefits of a wide range of different investments. Mutual funds combine the buying power of thousands of investors to offer several benefits including:
- A broad range of securities for a diversified portfolio
- Full-time professional money managers
- Low minimum initial investments
- The potential for additional compounding of returns through dividend reinvestment
Mutual Funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information, can be obtained by calling your Financial Advisor. Read it carefully before you invest.
Today, there are mutual funds to match almost every investment style, from conservative money market funds, to balanced funds with a mix of stocks and bonds, to aggressive stock funds that invest in small, rapidly growing companies or emerging countries. The more aggressive the investment, typically the more risk involved.
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