We've heard it over and over. Asset allocation...asset allocation...asset allocation. It starts to remind one of the way in which Felix expressed his exasperation at Oscar and his sloppiness with those three immortal words, "Oscar, Oscar, Oscar!"
Unfortunately, a lot of people are not quite sure what asset allocation really means. They believe it covers stocks, bonds, mutual funds, jewelry, cars, real estate, etc. etc. and so forth. Actually, asset allocation simply refers to the way in which one divides a portfolio among certain major asset classes known as stocks, bonds, and good ole cash. But, according to Kathryn Head, chairman of First Investors, "Your asset allocation strategy shouldn't be driven by the market's short-term developments, but rather by your investment goals, time frame, and risk tolerance."
In other words, she is saying that it's a pretty bad idea to allow short-term developments to unduly influence long-term investment plans. You might look at it this way: Most of the basic strategies associated with prudent investing are really timeless with the potential to help you stay on the right road no matter what happens.
However, a caveat here. Just because your asset allocation was appropriate five years ago doesn't mean it still applies today. Investment returns can shift considerably. For example, consider a portfolio at the end of 1994 that had an allocation of 60 percent stocks and 40 percent corporate bonds. By the end of 1999, that mix would show 78 percent stocks and 22 percent bonds because of investment performance. So the bottom line is that you wind up with a portfolio 15 years later that has a much higher risk potential.
Most solid planners will advocate your looking at your money from the long end of the telescope. This means giving your money time to grow instead of trying to "time" the market. According to Ms. Head, what you are looking for is compounding which is what transpires when you decide to reinvest earnings so that the assets subsequently produce additional earnings.
Here's the case in point. If you had invested $10,000 in the U.S. stock market on January 1, 1985 and you left the money in there without touching it in any way and reinvested any dividends or earnings, well 20 years later on January 1 of this year, that account would be worth almost $120,000. But, if you missed just the five best days of that period because you might have been moving money in and out, your account would now be worth only about $89,000. Quite a difference, eh?
What to do? If anything, review your portfolio on a regular basis to make sure it addresses your particular desires.
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