Investing your money and knowing your goals are important to growing your wealth. But there is no guarantee of investment success.
Asset allocation is a strategy for constructing an investment portfolio. Over the long term, asset allocation is the best determinant of investment success. Not picking individual securities or market timing, but focusing on broad categories of investments to find the right mix for you, according to:
- Your unique investment goals
- The time you have to invest
- Your tolerance for volatility
Asset allocation does not guarantee a profit or ensure against a loss, but it can help you manage the level and type of risk you face. Your objective is to construct a portfolio that can provide you the return on your investment you want, without exposing you to more risk than you are comfortable with. Various assets (like stocks, bonds, and cash equivalents) have different potential for return and loss, and typically do not respond to market forces in the same way at the same time. If you diversify by owning a broad mix of assets, a downturn in a single holding will not necessarily damage your entire portfolio.
There is no simple formula that can find the right mix for every individual. But finding and deciding on the right mix is one of the most important decisions that investors make. Because of market changes, life changes, and product changes, it is a smart idea to revisit your asset allocation from time to time with the help of a trained professional.