Allocation, Allocation, Allocation
When all is said and done, the mix of stocks, bonds, and cash you choose for your portfolio may have the greatest impact on your success in reaching your financial goals. Your asset allocation — the amount of money you put into different asset types — depends on your financial expectations, time frame, and risk tolerance. That’s why it’s important to design a plan that feels comfortable for you.
The Bustle of Broadway. Overall, stocks tend to be the "star performers" of the investment world. Historically, over the long term, stocks have generally outperformed other asset types. Investors who have many years before they’ll need their money may want to put a large percentage of their funds in stocks or stock mutual funds.1 Equity investments typically offer the best chance for earning inflation-beating returns.
You’ll also want to make sure you choose a good mix of stock types, such as international and large-, mid-, and small-cap stocks. And, if you’re buying stock mutual funds, it’s important to know which stocks the funds own to be certain you don’t hold too many of the same types of investments.
An Uptown Neighborhood. No single investment type is a star performer all the time, so it makes sense to invest your money in more than one asset class. Fixed-income investments,2 such as bonds, may offer a layer of protection for your portfolio when stocks are not performing well. Holding a portion of your portfolio in bonds may help cushion your losses in a down market.
In some years, bond returns have outpaced stocks by a significant margin. A well-diversified portfolio contains an appropriate mix of short-, medium-, and long-term bonds.
A Quiet Park. You may want to keep a percentage of your portfolio invested in cash investments, such as money market funds,3 Treasury bills, and certificates of deposit. If you need money for a sudden unexpected expense, these short-term investments are highly liquid and may easily be converted into cash. However, you probably don’t want to have too much of your portfolio in cash investments, since their typically lower rates of return may not keep pace with inflation.
Moving Day. As your investments grow, the asset allocation you chose for your portfolio may change. So, you’ll want to rebalance your portfolio periodically, either by selling some assets or redirecting some of your future contributions. But, remember, rebalancing may have tax consequences. Your financial professional can help you design a strategy that will help you reach your goals.
1Past performance is no guarantee of future performance. Mutual funds are sold by prospectus, which includes information on charges, expenses, and risks. To obtain a current prospectus, please contact your registered representative. Please read the prospectus carefully before you invest or send money.
2Prices of fixed-income securities may fluctuate due to interest rate changes. Investors may lose money if bonds are sold before maturity.
3An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
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