Whether you’ve invested in stocks and bonds or have a large savings account, it can make good financial sense to diversify your assets. Asset allocation can maximize the return on every investment you make and lower your risk of losing all of your money by investing. The U.S. Securities and Exchange Commission points out that how you allocate your assets depends on the number of years you expect to maintain your investment, and your willingness to lose some or all of your investment.
I’ve learned that there is no ideal formula for asset allocation and investments that produce the strongest returns can vary from year to year. How different investments perform depends on the economy and current interest rates, and some years are just better than others. Even though diversifying your assets can be a risky investment and money management strategy, there are still ways to reduce your investment risk and strengthen your financial position.
Types of Investments
When developing your money management strategy, you need to learn about different investment products and learn how much risk each one carries. Talking to a financial planner or financial advisor can make it easier to create a strategy that will help you maximize your return on investment and ensure that you are comfortable with the risk factors associated with each.
Different types of investment products available from your financial institution include:
– Stocks and stock mutual funds
– Corporate bonds
– Municipal bonds
– Bond mutual funds
– Lifecycle funds
– Exchange-traded funds
– Money market funds
– U.S. Treasury securities
The “safest” investment products are cash and cash equivalents. These include savings account, deposit accounts, certificates of deposit, treasury bills, money market deposit accounts and money market funds. These are considered to be safer because the risk of losing money on these types of investments is very low. Most of these investment accounts also have minimal or no withdrawal penalties, so you have easy access to your cash when you need it.
Asset Allocation and Risk Tolerance
If you are saving for college or want to save funds for retirement, your best strategy is to invest in stocks, bonds or cash accounts. Stocks typically offer some generous returns but also carry a higher risk. Bonds offer modest returns on your investment but can be an attractive investment option when you have a large amount of money available and don’t plan to spend it in the near future.
Most people who are beginning an asset allocation strategy need to evaluate their risk tolerance for various types of investment products. Diversification can help you reach your financial goal and if you don’t allocate funds towards some high-risk investments, you may never see a strong return.
Still, you get to choose your investment approach. Most people fall under one of the following categories:
Aggressive asset allocation: Higher percentage of stocks to bonds and a good match for those with a high risk tolerance
Moderate asset allocation: Lower percentage of stocks to bonds in the portfolio and a good match for those with a medium risk tolerance
Conservative asset allocation: Lowest percentage of stocks to bonds and a good match for those with a low risk tolerance