MONEY MATTERS: Diversity important in asset allocation

One of the many important decisions for your investment portfolio is that regarding asset allocation.
Asset allocation is an approach in which you spread investments over different asset categories, such as equities, cash like investments, bonds, real estate, foreign securities, and possibly even precious metals and collectibles.
How you allocate your assets hinges upon several factors, including your investment objectives, attitudes toward risk and investing, desired return, age, income, tax bracket, time horizon, and even your belief in what the market will do in the near term and long term.
Here is an Example:    Let’s say your investment objective is substantial asset growth, you have a 10- to 15-year horizon, and you are willing to assume a high amount of risk. You may place a larger percentage of your funds in stocks of newer, growing companies.
In contrast, another investor — whose objective is preservation of principal with a 5-year time horizon, and who doesn’t want substantial risk — may invest more heavily in government or banking instruments. Your asset mix, the specific investments you choose within each asset category and the timing of your investments all play a part in your overall return.
The underlying principle in asset allocation is the documented observation that different broad categories of investments have shown varying rates of return and levels of price volatility over time.
By diversifying your investments over asset classes, you potentially reduce risk and volatility. Generally, downturns in one investment class are expected to be tempered (or even offset) by favorable returns in another. Just as using different asset categories within a portfolio has the potential to reduce your risk, your choice of individual assets within a class can do the same.
For instance, choosing stocks from different industries (e.g., automotive, high technology, retail, or utilities) within your stock allocation can be less risky than investing all of your stock allocation in one industry or company.
Generally, the higher the expected return on an investment, the higher the risk. The longer your investment time horizon, the more volatility risk you may assume than in the short run by allocating more of your investment to higher-risk (aggressive) assets.
With a longer-term investment horizon, you can ride out several economic cycles. A shorter time frame usually requires a more conservative approach, meaning that you may want to reallocate investments into a lower volatility mix of asset classes as the time approaches to convert your investments to cash for your particular goal.

Monitoring and
rebalancing
asset allocation
The manner in which you practice asset allocation today may not be appropriate for you in the future. This can be the result of economic fluctuations and/or changes in your investment objectives. In addition, any growth or decline within asset classes may cause your asset allocation ratios to shift. For this reason, it is important to monitor your asset allocation periodically and rebalance your portfolio as needed. Rebalancing your portfolio requires you to shift funds from one asset class to another in order to regain the ratios you determined appropriate for your investment portfolio.
Here is an Example:    Let’s say that on January 1 you determined that your assets should be allocated to 60 percent stocks, 20 percent bonds, and 20 percent cash, and that you placed your investments accordingly. The stock market has a very good year, and due to growth in that category, you discover at the end of the year that your ratios have shifted. Now, 70 percent of your portfolio’s value is in stocks, 15 percent in bonds, and 15 percent in cash. What should you do? Well, if you want to keep the same percentages you began with; you could sell some stocks and invest in bonds and cash instruments to bring your portfolio back into the balance you chose. Another alternative is to add any new cash you are able to invest into the asset classes with a decreased percentage of holdings.
To obtain more information regarding this, listen to our weekly radio talk show “WHTC Money Matters” on 1450AM at 10:10am every Saturday Morning.  Our next radio show’s topic is “Tax Free Investing and how to Lower your Taxes” on August 2, 2008.
For future editions we want to hear from you, please email or call us with your questions or comments:  Koele Godfrey Investment Group, KoeleGodfrey@lpl.com 616-931-1223, Toll Free 866-512-7164.  We are located at 123 E Main Ave, Zeeland.  Visit our Website at www.KoeleGodfrey.com for more information.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing.  Securities and Financial Planning offered through LPL Financial, Member FINRA/SIPC