What is Asset Allocation and Why is it Important?
Asset allocation is the collection of investments that you own - and it is distinctly yours. It is a personalized plan designed to meet your individual goals.
Using the Power of Asset Allocation to Meet Your Goals
An easy analogy to help you understand asset allocation is to think of a recipe. Each ingredient is part of a whole and when combined together, they create just the right mixture. If you leave one ingredient out, the end result won't taste quite right.
Asset allocation is similar in that if your portfolio does not include the right combinations of stock, bonds and other asset classes, it may not deliver the results you are looking for — it may be too risky or underperform, so you are unable to achieve your investment objectives. The ingredients in your asset allocation plan should be carefully chosen to deliver the right balance of risk and return, and periodically reviewed to make sure it remains properly aligned with your goals.
Everyone is different. Your cousin may have the fortitude and youth to invest aggressively, seeking higher returns with the understanding that he or she has the time needed to recuperate from any losses. Your grandfather will probably avoid risk because he can’t afford to lose what he already has. Your neighbor may have more latitude because he has built up his savings and has a safety net. You, however, may be naturally cautious — concerned that you do not have the wherewithal to remain disciplined during times of market volatility — and may decide to take a moderate stance.
Over time, your strategy will change. Your asset allocation — whether you are conservative or aggressive — should be based on what you want from your investments. And as the years pass, those goals will change. When you are young you need to save up for a big goal, such as purchasing a new home. During your high-earning years, you may be able to invest more income or you may need it to send a child to college. And as you near retirement, you may become more concerned about protecting your savings and generating a reliable flow of income.
How Asset Allocation Works
Markets are cyclical. What's hot today — whether it's asset class (such as stocks or bonds) region (such as emerging markets), a market sector (such as technology), or an investment style (such as value investing) — will eventually fall out of favor.
So rather than attempting to invest in the most rewarding asset class, asset allocation sets a specific goal, spreading your investments across different types of assets and positioning you to take advantage of opportunities as they appear. Let’s say you decide the right mix is 60% U.S. stocks, 30% bonds and 10% cash. If the U.S. stock market rises in value and you realize investment gains, the stock portion of your total portfolio will become larger. This means you will need to rebalance your portfolio, selling off the extra gains, buying more of the rest of your portfolio and resetting it back to your 60/30/10 allocation. In this way you can capture market gains, diversify to minimize risk, and always remain focused on your goals.
Keeping Your Portfolio On Course
Considerations for developing your asset allocation strategy
- Why are you investing? What are your goals? Remember, you likely have more than one goal.
- How long do you have to realize those goals?
- What is your current financial situation? Do you feel secure? Do you have a job or a financial safety net?
- What major life events do you foresee, short or long-term, that may impact your strategy?
- How comfortable are you with risk? How much can you afford to lose should the market decline?
- What is your tax bracket? Do you need to minimize the impact of taxes?
- What are your investing preferences? Are there certain investments or assets you wish to include (such as a business or inherited stock) or exclude?
Your asset allocation plan is one of the most important decisions you and your advisor will make. Your financial advisor can help you with your asset allocation plan and financial planning. For more information, contact Dreyfus at 1-800-896-8168.
Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Download a prospectus, or summary prospectus, if available, that contains this and other information about a mutual fund, and read it carefully before investing.