Allocating your money to different types of investments can reduce your investment risk while still producing gratifying investment returns.
You’ve no doubt heard the real estate adage, “Location, location, location.” In the financial world, asset allocation is to investing what location is to real estate, so the mantra on Wall Street is “Diversify, diversify, diversify.” To invest with success, define your investment goals and then use asset allocation to achieve those goals without losing any sleep. Savvy investors don’t try to keep pace with market averages or pursue trendy investment sectors. Instead, they assess the level of risk that makes sense for them, choose an asset allocation appropriate for their levels of risk and return, and stick with the plan. By focusing on the big picture, you too can work less and make better investments.
Time horizon, investment objectives, investment experience, and your stomach’s ability to accept price volatility all influence your tolerance of risk. If you are investing to fund your retirement 30 years from now, you can afford to take more risks because you have more time to recover from temporary setbacks. However, if you want to invest the money you need to pay taxes in three months, you’d better find a safe place, because Uncle Sam won’t listen to your excuses.
Beginners are better off with safer investments. Watching the ups and downs of volatile investments ...