Asset Allocation

If you're already an investor, you know that market conditions change over time and some investments will outperform others. To limit your risk, it’s recommended that you spread your nest egg out across a variety of investments. It’s known as diversification.

It works because investment types, like stocks and bonds, react differently to different economic climates. If the value of one type of investment drops, you may be able to moderate your losses without giving up too many potential gains.

And diversifying is often easier than you think. While stocks, bonds and cash-equivalents are the most basic investment types, mutual funds, variable annuities and variable life insurance products are often made up of shares of each of these types of investments. So although diversification isn't automatic, you have the opportunity to diversify your portfolio with these products.

Taking the guesswork out of investment diversification

A great way to ensure diversification is to employ a strategy called asset allocation. Asset allocation distributes your investment among the three major asset classes: stocks, bonds and cash equivalents. Because each asset class is different and performs differently in response to market changes, asset allocation may help you manage risk. Your asset allocation strategy should be consistent with how you like to invest (also know as your investor profile) and how much time you have until you want to reach your goal (often referred to as your time horizon).

Your investor profile (conservative, moderate or aggressive) is determined by your age, risk tolerance and other retirement assets. Your time horizon is the anticipated average length of time your assets will remain invested. Your investment professional can help you decide on the best mix of asset classes, based on the amount of risk you're comfortable with and your financial target.

The use of diversification and asset allocation as part of an overall investment strategy does not assure a profit or guarantee against loss in a declining market. Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved.

Emergency funding goals

You should have an emergency fund to protect yourself against unexpected events, such as a death in the family or job loss. Since an emergency could occur at any time, your emergency funds should be located in lower risk accounts where the money is easily accessible and where low or no withdrawal penalties are imposed. Here’s a good rule of thumb: Have three to six month’s worth of living expenses readily available.