What is asset allocation?
An easy analogy to help understand asset allocation is to think of a recipe. Each ingredient is part of the whole recipe and when combined together, they create just the right mixture. If you left one ingredient out, the end result wouldn't taste as good.
Asset allocation is similar in that if your portfolio only had bonds in it, it really wouldn't offer peak performance potential and wouldn't perform as well as it could.
Asset allocation is an investment strategy that systematically allocates percentages of money across various asset classes in an attempt to balance risk and reward based on risk tolerance and goals.
Why is asset allocation so important?
Your overall asset allocation plan - how your portfolio is invested across stocks and bonds, growth and value stocks, etc. - is one of the most important decisions you and your advisor will make. Because markets are cyclical, what's hot today may not so hot a few weeks from now.
By spreading your investments across different types of asset classes and markets (foreign and domestic stocks and bonds), you position yourself to take advantage of the opportunities as the markets shift in and out of favor.
As important as it is to develop a personalized asset allocation plan that's right for you, it is also essential to periodically review and rebalance your assets to help ensure your investment plan is properly aligned with your goals. Over time, portfolios can easily become over- or underweighted in different asset classes - throwing off your asset allocation plan.
Form your asset allocation strategy carefully, keeping in mind that to maximize its effectiveness, it needs to be custom-designed and updated regularly, and you'll have to stick with it over time.
Your financial advisor can help you with your asset allocation plan and financial planning. If you don't already have an advisor, we can help you find one now.
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 the fund, and read it carefully before investing.