you’re an investor who wants focus on long-term
results rather than short-term wins, you need to know
how to apply asset allocation and rebalancing to your
portfolio. These two investment concepts are essential
to building a foundation for your financial success.
allocation refers to investing in many types of assets,
including stocks, bonds, real estate, minerals, precious
metals and more to balance your investment risk and
reward. But educated investors know that asset
allocation is far more important than security
selection. After all, even if you buy the right
investment at the right time, watching it double in
value won’t do you much good if you had invested only
1 percent of your money into it.
is why you need to focus on percentages, not dollars.
The amount of money you have fluctuates daily, but the
percentage never changes: You always have 100 percent of
your money — never more, never less. So instead of
trying to decide how much money to place into a given
investment, decide the percentage you’ll invest there.
For example, if you put 20 percent of your money in a
given asset class, you’ll know to buy or sell if the
allocation drifts far beyond your chosen level (say, if
the asset rises to 25 percent or falls to 15 percent).
you allocate your money among the 20 major asset classes
and market sectors depends on your goals and how much
time you have to achieve them. For example, two people
might own identical investments, but the person saving
for a retirement 30 years away will allocate money among
investments very differently from the person who’s
planning to pay for college in two years. That’s why
professional financial planners create asset allocation
models for clients only after developing a thorough
understanding of the client’s goals.
there’s a dramatic drop in prices of some given asset
class, investors — and the media — often overlook
the fact that other asset classes are rising.
Rebalancing takes advantage of situations like these.
When one asset class is up, you sell some and buy more
of the asset class that’s down. Thus, you can sell
overperforming assets and buy underperforming assets.
is important. If you don’t do it, your portfolio could
eventually comprise too much of one asset class and too
little of another. That could be devastating to you if
the over-weighted asset class suddenly falls in value
— as those who had all their money in tech stocks
discovered in 2000, or real estate in 2007. You can
reduce this risk by maintaining a diversified portfolio.
But, of course, no investment strategy can guarantee you’ll
never lose money.
you’re unsure how to apply these concepts to your
investments, talk with an objective, fee-based financial
strategies, such as asset allocation, diversification or
rebalancing, do not assure or guarantee better
performance and cannot eliminate the risk of investment
losses. There are no guarantees that a portfolio
employing these or any other strategy will outperform a
portfolio that does not engage in such strategies.