Asset Allocation

Asset allocation is the process of determining, and then investing in, the proper mix of stocks, bonds, and cash (or equivalents) for a portfolio given the circumstances at hand.

Since each of those three major asset categories has different risk characteristics, perhaps the most important factor affecting one's allocation is his or her attitude toward risk. In general, stocks have in the past presented the best returns but also the most risk versus cash and bonds. Bonds have not been immune from risk either, as periods of rising interest rates and credit difficulties have caused bonds to decline and in rare cases default. Cash is fairly secure, though the returns over time have done little to stay ahead of inflation.

Other pertinent issues might include:

one's age relative to retirement and life expectancy

projected large expenditures

income, both current and expected

Most rational portfolios will consist of securities of all three types of securities. Those who seek gains most aggressively, but are tolerant of potentially substantial short term losses, would be inclined to have high allocations to stocks. Those most troubled by any loss will be served best by large cash and bond allocations.

As a demonstration of asset allocation among different risk profiles, review the model portfolios we present to our retirement plan client participants.