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Many types of mutual funds are out there for you to invest in. But choosing an investment really depends on some key criteria: your investment objective, your current income, your age, and your risk tolerance level.
There is no opportunity without risk. When you invest, you have to be prepared for risk. There is simply no avoiding it. But there is a way to minimize risks to a level you can tolerate.
Asset allocation is the collection of investments that you own – and it is distinctly yours. It is a personalized plan designated to meet your individual goals.
Many types of mutual funds are out there for you to invest in. But choosing an investment really depends on some key criteria: your investment objective, your current income, your age, and your risk tolerance level. A financial professional can best help you clearly define your investment objectives and help determine a mix of investments consistent with those objectives.
There is no opportunity without risk. When you invest, you have to be prepared for risk. There is simply no avoiding it. But there is a way to help minimize risks to a level you can tolerate.
Below we briefly outline some of the most common investment risks. However, one of the least considered types of risk is behavioral risk — the personal emotions that rise and fall with the ups and downs of the market. Behavior risk is usually greatest in down markets as investors watch the value of their investments fall. It is important to understand what level of risk you can tolerate and how much you can afford to lose — and invest accordingly. Otherwise, you might be inclined to sell when a stock is falling and lock in a loss.
Asset allocation is the collection of investments that you own - and it is distinctly yours. It is a personalized plan designed to meet your individual goals.
An easy analogy to help you understand asset allocation is to think of a recipe. Each ingredient is part of a whole and when combined together, they create just the right mixture. If you leave one ingredient out, the end result won't taste quite right.
Asset allocation is similar in that if your portfolio does not include the right combinations of stocks, bonds and other asset classes, it may not deliver the results you are looking for — it may be too risky or underperform, so you are unable to achieve your investment objectives. The ingredients in your asset allocation plan should be carefully chosen to deliver the right balance of risk and return, and periodically reviewed to make sure it remains properly aligned with your goals.
Everyone is different. Your cousin may have the fortitude and youth to invest aggressively, seeking higher returns with the understanding that he or she has the time needed to recuperate from any losses. Your grandfather will probably avoid risk because he can’t afford to lose what he already has. Your neighbor may have more latitude because he has built up his savings and has a safety net. You, however, may be naturally cautious — concerned that you do not have the wherewithal to remain disciplined during times of market volatility — and may decide to take a moderate stance.
Over time, your strategy will change. Your asset allocation — whether you are conservative or aggressive — should be based on what you want from your investments. And as the years pass, those goals will change. When you are young you need to save up for a big goal, such as purchasing a new home. During your high-earning years, you may be able to invest more income or you may need it to send a child to college. And as you near retirement, you may become more concerned about protecting your savings and generating a reliable flow of income.
Markets are cyclical. What's hot today — whether it's asset class (such as stocks or bonds) region (such as emerging markets), a market sector (such as technology), or an investment style (such as value investing) — will eventually fall out of favor.
So rather than attempting to invest in the most rewarding asset class, asset allocation sets a specific goal, spreading your investments across different types of assets and positioning you to take advantage of opportunities as they appear. Let’s say you decide the right mix is 60% U.S. stocks, 30% bonds and 10% cash. If the U.S. stock market rises in value and you realize investment gains, the stock portion of your total portfolio will become larger. This means you will need to rebalance your portfolio, selling off the extra gains, buying more of the rest of your portfolio and resetting it back to your 60/30/10 allocation. In this way you can capture market gains, diversify to minimize risk, and always remain focused on your goals.
Considerations for developing your asset allocation strategy
Your asset allocation plan is one of the most important decisions you and your financial professional will make. Your financial professional can help you with your asset allocation plan and financial planning. For more information, contact us at 1-800-645-6561.
Asset allocation and diversification cannot assure a profit or protect against loss.
S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies, widely regarded as the best gauge of large-cap U.S. equities. Indexes do not include any expenses, fees or sales charges, which would lower performance. The indexes are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.
Portfolio turnover is a measure of how frequently assets within a fund are bought and sold by the managers.
Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or Moody's. Anything below this 'BBB' rating is considered non-investment grade. If the company or bond is rated 'BB' or lower it is known as junk grade, in which case the probability that the company will repay its issued debt is deemed to be speculative.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. Download a prospectus, or summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.
All investments involve risk including loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing. Asset allocation and diversification cannot assure a profit or protect against loss.
All investments involve risk including loss of principal. Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. The amount of public information available about municipal securities is generally less than that for corporate equities or bonds. Legislative changes, state and local economic and business developments, may adversely affect the yield and/or value of; municipal securities. Other factors include the general conditions of the municipal securities market, the size of the particular offering, maturity of the obligation, and the rating of the issue. Income for national municipal funds may be subject to state and local taxes. Income may be subject to state and local taxes for out-of-state residents. Some income may be subject to the federal alternative minimum tax for certain investors. Capital gains, if any, are taxable. Equities; are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. There is no guarantee that dividend-paying companies will continue to pay, or increase, their dividend. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, an d less market liquidity. These risks generally are greater with emerging market countries. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing. High yield bonds involve increased credit and liquidity risk than higher rated bonds and are considered speculative in terms of the issuer’s ability to pay interest and repay principal on a timely basis. Risks of investing in real estate securities are similar to those associated with direct investments in real estate, including falling property values due to increasing vacancies or declining rents resulting from economic, legal, political or technological developments, lack of liquidity, limited diversification and sensitivity to certain economic factors, such as interest-rate changes and market recessions. Real estate investment trusts are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass through of income.
Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.
This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular investment, strategy, investment manager or account arrangement and should not be used as the primary basis for any investment decisions. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. This material does not take into account the particular investment objectives, restrictions, or financial, legal or tax situation of any specific investor. An investment in an investment product is not suitable for all investors. Please consult a legal, tax or investment professional in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.
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