Looking for a better investment strategy? Consider asset allocation

If you’ve ever been stuck in heavy traffic, you know how it always seems to go: you’re surrounded by hundreds of cars trying to get to the same place as you; his lane is going nowhere, and everyone around him seems to be moving just fine. Until you change lanes, that is. That’s when your old lane starts moving forward and your new lane stops. Sounds familiar?

These days, navigating the financial markets is a lot like being stuck in heavy traffic. You have your money invested in a traditionally strong asset class, real estate or common stocks, for example, but it doesn’t seem to be going anywhere. So you move it to a sector of the market that seems to be enjoying better performance, and what happens? Your old asset class takes off and the new one grinds to a halt, leaving you and your asset-building plans aimless.

Changing investment strategies in response to lackluster performance, just like changing lanes in heavy traffic, carries a number of potential risks. National and world events, changes in the economy, even bad weather, can affect what happens with your money on a day-to-day basis. There is simply no way to look ahead to see what comes next and there is no guarantee that your new strategy will work better than the old one.

So how can you get out of the “slow lane” and position yourself to take better advantage of periodic rallies in more than one sector of the financial markets? For many investors, the answer is an asset allocation strategy.

Asset allocation is the practice of spreading your money among several different asset classes (for example, stocks, bonds, mutual funds, certificates of deposit, annuities, etc.) to reduce your exposure to loss and increase your opportunities for growth. Portfolios that include different types of investments generally enjoy a greater degree of protection against market volatility than those that do not. For example, when stock prices go up, bond prices generally go down, and vice versa. If you have money invested in both stocks and bonds, losses you suffer on one investment can potentially be offset by gains on the other.

How do you determine what type of asset allocation mix is ​​right for you? The answer largely depends on your risk tolerance and investment time horizon. If you’re the type of person who stays up at night worrying about what the stock market is going to do, you probably have a low to moderate risk tolerance. If you’re not as concerned with what the markets are doing on a daily basis and are willing to take higher levels of risk for potentially larger gains, you may want to consider more aggressive investing. In either case, your asset allocation strategy should reflect your risk tolerance.

Your investment time horizon is simply the number of years between now and when you will need access to your money. The longer the time horizon of your investment, the more time you have to recover from potential losses. People with long investment time horizons often feel more comfortable investing in riskier but potentially more rewarding investments. Conversely, the closer you get to needing your money, the less comfortable you’ll be risking it. People nearing retirement, for example, typically move their money into less risky and more conservative investment vehicles.

Once you understand your risk tolerance and investment time horizon, you will likely base your asset allocation strategy on one of four general asset allocation models: capital preservation, income, income and growth (balanced), or growth. .

Capital preservation models are largely designed for investors who expect to need their money within a few years, people who cannot or do not want to put any part of their capital at risk. The income models are designed for people who require current income. Typically, these are people who are nearing retirement or have others who depend on them for support. Balanced models tend to compromise between capital preservation, income, and growth, and are generally understood as a mix of assets that appreciates over time and generates current income. Balanced models are ideal for people who still have time to accumulate assets, but do not have a particularly high risk tolerance. Finally, growth models are designed for people with a long-term investment horizon and above-average risk tolerance. Typically, these are young working people who are just beginning an asset accumulation program.

Regardless of where you are in life, it’s never too late to develop an asset allocation strategy, especially if you’ve been feeling stuck in the “slow lane” when it comes to your investments. The right asset allocation mix will not only help you maintain your confidence through the troubled economic waters ahead, but could also increase your potential for better returns in years to come. Keep in mind, however, that neither diversification nor asset allocation ensures a profit or guarantees against loss.

You can’t drive in three lanes of traffic at once, but by working with a trusted financial professional, you can get back on the road to a secure financial future.