Build Financial Success With Sound Asset Allocation

Stock quotes, P/E ratios, economic forecasts, and other financial data are easy to come by, thanks in part to the proliferation of information on the Internet. And with trading capabilities available at the click of a mouse, it might be easy to get carried away. You may be tempted to try your hand at picking the next hot stock, or trade on a short-term basis. Instead, take a lesson from professional money managers, who know that creating and maintaining the proper proportion of assets can typically do more to help maximize a portfolio’s potential returns and manage its risks.

Pick a Professional Strategy
Asset allocation refers to the distribution of your assets among various investment classes, such as stocks, bonds, and cash. Professional money managers determine a strategic — or target — asset allocation based on your objectives, time horizon, and risk tolerance. Historical performance data gives them information about the risk, expected returns, volatility, and correlation of investment categories that they can use to determine optimal long-term weightings for each asset class. They then combine assets to create a portfolio with the desired risk and return characteristics for your particular situation.

The Tactical Difference
Once the strategic, or long-term, asset allocation has been established, a professional money manager may choose to take a more active, or tactical, approach to the portfolio structure, to potentially add value. Through market analysis, experts identify changes in economic and market conditions, returns, volatility, or correlation expectations that may affect the value of the various asset classes included in the portfolio. They use that insight to make short-term adjustments to the portfolio’s long-term target asset mix to capture any significant differences between the investment’s value and its market price. This tactical approach may potentially help professional money managers enhance returns and manage risk in their investors’ portfolios.

Because it plays a critical role in your portfolio’s performance, a properly constructed asset allocation is the foundation of a successful financial strategy. As an individual investor, chances are you don’t have the time to investigate all the investment options available. But that doesn’t mean you can’t have a portfolio that is tailored to your needs. Take advantage of professional advice, which can help you create an asset allocation that may get you started in your pursuit of a solid financial future.

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