Why understanding asset allocation is key

Determining the mix of investment types is one of your most important tasks as an investor. Every investment has different strengths that allow it to play a specific role in your overall strategy. For instance, some investments may provide regular income while others may serve as a temporary place to hold for cash. Some even have multiple purposes and can fill more than one role.

Because you probably have multiple goals, you need a combination of investments to help you achieve short- and long-term objectives. That’s the purpose of an intentional asset allocation strategy. The key is to manage risk while seeking to achieve a targeted rate of return.

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To illustrate that concept, let’s look at a hypothetical situation. Let’s say your goal is to achieve a 7.5 percent return on your investments. Let’s assume stocks can average a 10 percent return per year and bonds can return 5 percent annually. One possible way to achieve your 7.5 percent goal is to select a 50-50 mix of stocks and bonds.

That being said, this is not a foolproof strategy, and there’s no way to predict if it will work out exactly that way. There is no guarantee that investments will perform the same way as they did in the past. However, being intentional about your asset allocation gives you a place to start.

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