Risk Management: Why You Need Portfolio Diversification and How to Achieve It
When you create an investment strategy, your asset allocation should reflect your goals, time horizon and tolerance for risk.
Asset allocation is an investment strategy that aims to balance risk and reward by a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon.
Over time, however, one or more of these three factors may change, and your portfolio may need adjustments to reflect your new investing priorities.
Diversification
The saying “don’t put all your eggs in one basket” applies also to investing. Over time, certain asset classes may perform better than others. If your assets are mostly held in one kind of investment, you might feel a bit of pressure if that asset class experiences volatility.
It's important to know, however, that diversification is an approach which can help manage investment risk. It does not eliminate the risk of loss if an investment sees a decline in price.
Asset allocation strategies are also used in portfolio management. When a financial advisor asks you questions about your goals, time horizon, and tolerance for risk, we are getting a better idea of what asset classes may be appropriate for your situation. And, just like diversification, asset allocation is an approach to help manage investment risk. It does not eliminate the risk of loss if an investment sees a decline in price.
What Factors Help Determine an Appropriate Mix
While appropriate asset allocation is determined by each individual's situation, there are three factors to consider:
Time
Investors with longer timeframes might feel more comfortable with investments that offer higher potential returns but also carry a higher risk. A longer timeframe may allow individuals to ride out the market’s ups and downs. An investor with a shorter timeframe may need to consider market volatility when evaluating various investment choices.
Goals
Goals come in all shapes and sizes, some are long-term, while others have a shorter time frame. Identifying your goals can help you keep on target.
Risk Tolerance
An investor with higher risk tolerance may be more willing to accept greater market volatility in the pursuit of potential returns. An investor with a lower risk tolerance may be willing to forgo some potential return in favor of investments that attempt to limit price swings. A financial advisor can help you figure out what your risk tolerance is.
Have Your Priorities Changed?
If so, this may be the time to review and possibly adjust the investment mix in your portfolio. Asset allocation is critical when creating your investment portfolio. Contact Cappuccino Financial to help when considering which investments are appropriate for your long-term strategy.
This content is developed from sources believed to be providing accurate information, and provided to Joseph Cappuccino by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.