Maintaining a portfolio with a mix of stocks and bonds that
suits your risk tolerance and time horizon, a practice known as asset
allocation, has been a fundamental tenet of investing for a long time. Although
asset allocation does not assure a profit or protect against loss in a
declining market, investors who base their investment strategy on a target
asset allocation may find it easier to stick with it when the stock market
experiences significant ups and downs.
One reason may be that the
balance of stocks and bonds helps investors avoid significant losses. Stocks
and bonds historically have not moved in tandem in response to economic or
market developments, although past performance does not guarantee future
Points to Consider
When deciding on a target asset allocation, it may be helpful
to consider your risk tolerance and time horizon. Stocks historically have
exhibited more short-term ups and downs compared with bonds and other more conservative
investments.1Because of this historical trend, a larger allocation
to stocks may be appropriate for those who plan to remain invested for the long
term and who can tolerate short-term swings in value. Those who may need to
access their money in the short term may want to consider a greater emphasis on
more conservative investments with the goal of preserving principal.
In addition, feelings about
risk also come into play. Some individuals are uncomfortable with investment
risk, which is the possibility that the value of their portfolio could decline.
Historically, many investors with a low tolerance for investment risk have
allocated a larger portion of their portfolios to bonds or cash investments.
It's important to remember, though, that these more conservative investments
also carry some risk. Bonds are subject to market and interest rate risk if
sold prior to maturity. Bond values will decline as interest rates rise and are
subject to availability and change in price.
Risk is part of investing,
and it's important to understand the potential upside and the potential
downside of every investment. That said, a balanced portfolio, may help you
stay focused, even when Wall Street seas are choppy.
For more information, contact:
John C. Farley. AAMS
Newport Wealth Management
3047 East Main Road
Portsmouth, RI 02871
Securities offered through LPL Financial. Member FINRA/SIPC
1Sources: Standard & Poor's; Barclays Capital. Stocks are
represented by the S&P 500, investment-grade bonds by the Barclays Capital
Aggregate Bond Index. Past performance does not guarantee future results.
2011 McGraw-Hill Financial Communications. All rights reserved.