David Cook, CFP® explains that asset allocation is the most important decision an investor can make. It is the science of combining different asset classes together to give you an efficient balance between return and risk. Understand how to diversify your portfolio and the different types of bonds you can invest in.
“Hi, I’m David Cook, CERTIFIED FINANCIAL PLANNER™ with Pure Financial Advisors, and this is your Question of the Week. What is asset allocation? Asset allocation is one of the most, if not the most important decisions an investor can make. It is really the heart and soul of a well-diversified portfolio. It’s the science of combining different asset classes together, to give you that efficient balance between return and risk. You should have anywhere between a dozen and two dozen asset classes in a portfolio. The more each asset class moves independently of each other, the more diversified your portfolio will be. Asset classes such as U.S. large growth stocks, U.S. large value stocks, emerging stocks, European value stocks, corporate bonds, municipal bonds, government bonds–what it is is that those combinations are going to give you that efficiency between return and risk.
Diversification is really the result of a good and properly allocated portfolio. Diversification was once described as the only free lunch in the investment game. A lot of times we put the car before the horse, or as Warren Buffet once said, “investing is simple, not easy.” As any theory in practice can sometimes become flawed. What happens is we let fear and greed dictate which individual stocks or mutual funds to include into our portfolio. We not only fail to implement a proper asset allocation strategy, we defy years of science and even logic and we do the opposite–we speculate. We really shouldn’t speculate, especially with something so important as retirement. Rather than speculate, we should let the science of investing be our guide. I’m David Cook with Pure Financial Advisors, and that’s your Question of the Week.”