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Learn more about the building blocks of developing a financial plan and more.
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 advisor 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 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 loose — 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.
Stocks and bonds form the cornerstone of most asset allocation plans. Combinations of the two offer, in our view, a useful risk/reward tradeoff for investors.
Past performance is no guarantee of future results. Chart provided for illustrative purposes and not indicative of the past or future performance of any Dreyfus product.
Standard deviation is the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. It is widely applied in modern portfolio theory, where the past performance of securities is used to determine the range of possible future performance, and a probability is attached to each performance.
Considerations for developing your asset allocation strategy
Your asset allocation plan is one of the most important decisions you and your advisor will make. Your financial advisor can help you with your asset allocation plan and financial planning. For more information, contact Dreyfus at 1-800-896-8168.
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.
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. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor 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. The Dreyfus Corporation and MBSC Securities Corporation are subsidiaries of BNY Mellon.