What Asset Allocation Can Do For You
Aug 29, 2010 / By: Michael Bonfrisco, Estate Planning Attorney / Category: Financial PlanningAsset allocation means distributing your investments through various types of financial instruments so that your risk is well-diversified. This concept is not as technical as it sounds and with a little professional guidance, you can build a strong and diverse investment portfolio.
The reason for diversifying is simple: investing money means risk. But if you investment in several financial instruments, you essentially reduce that risk since the chances of one failing can be covered by benefits from the others. For example, if you put all your money in technology stocks and that sector of the financial market suffers a depression, then your losses would be very high.
However, if you have a mix of technology and infrastructure stocks, as well as others, the slump in the tech stocks could be covered by the infrastructure and other stocks. Asset allocation is all about wise selection of investment options.
In addition to fluctuations within a given field or specialty, risk can also vary depending upon the type of investing tool you’re using. Stock for example, are typically riskier than bonds, so having a balanced spread between the two can help lower your risk as well.
You’ll also want to look at mutual funds and money market accounts – both good investing options for investors who want to see growth but also need to minimize risk.
You’ll also want to ensure that some of your investments are liquid, meaning you can access their value relatively easily and without paying large penalties for early withdrawal. This gives you an emergency fund if you need it while still earning a reasonable return on your money.
Of course, there’s no way to explain everything you need to know about investing in one article. Instead, you should seek the help of a qualified financial planner before deciding on any investment strategy.
The Bonfrisco Law Firm is a member of the American Academy of Estate Planning Attorneys.
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