It’s a fact of investing life that market conditions change over time and some investments will outperform others. So how can you manage your risks in the face of such changes? Consider asset allocation.
With asset allocation, you distribute your investments among the three major asset classes – stocks, bonds and cash equivalents. Because each type of investment reacts differently to market changes, the strategy may help you manage risk. If the value of one drops, others may rise or hold steady to help offset the losses.
You may have some diversification if you own mutual funds, variable annuities and variable life insurance products because they are often made up of shares of each of these types of investments.
Match your asset allocation strategy to your situation
Your asset allocation strategy should be consistent with how you like to invest (your investor profile) and how much time you have until you want to reach your goal (your time horizon).
Your age, risk tolerance and other retirement assets determine your investor profile – conservative, moderate or aggressive. Your time horizon is how long you expect your assets will remain invested.
What asset allocation is right for your situation? Your investment professional can help you decide how to mix asset classes based on the amount of risk you're comfortable with and your financial target.
Remember: Using 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.
Review your investment mix regularly
It’s worth the time to evaluate your investments and financial goals on a regular basis with your investment professional. Your needs and goals may change over time. When you’re close to reaching a major financial goal, such as helping to put a child through college, you may want to adjust your allocation to reflect the change.