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Asset Allocation and Diversification

Asset Allocation and Diversification
by Susan Posey

Remembering the Basics of Investing

A bull market can leave many investors feeling pretty good about their ability to prosper. Their confidence bolstered by the good times, some even find themselves swept up in "bull market myopia" and forget the basic tenets of smart investing, like asset allocation and portfolio diversification.

Stock returns have averaged 15% over the past sixteen years, beating the long-term return rate since 1926, which is more like 10%. Extraordinary performance, however, can create a false sense of security. As a result, many investors can make mistakes such as overdosing on equities, concentrating too heavily in one particular stock, picking stocks on their own, trying to time the market, failing to rebalance their portfolios, investing short-term money in stocks, or basing their investment goals on unrealistic market assumptions.

Investors should regularly review their answers to some basic questions: What are my ultimate investment goals? What is my tolerance for setbacks? How fast do I want my investments to grow? How quickly do I need to reach my goal?  Is my primary concern financial security or (higher) potential rewards?  To what extent do I need access to my assets? The answers to these questions are the same as they have always been: asset allocation, portfolio diversification, a long-term investment strategy, and professional management and investment guidance.

Asset Allocation

Asset allocation involves spreading your holdings across different asset classes which typically include stocks(equities), bonds (fixed income), and cash equivalents. Basically, asset allocation means not putting all of your financial eggs in the same basket.

Asset allocation is important because it helps balance risk and reward. In general, the greater the investment risk, the higher the potential for increased total returns. By spreading your holdings among different asset classes, you help balance risk with reward. Assessing your goals, your timeframe, and your risk tolerance are critical in determining what types of assets to purchase, and in what proportion.

Portfolio Diversification

Once an appropriate asset allocation has been determined, diversification within those asset classes is necessary to achieve an effective, well-rounded investment strategy and to reduce risk. If you hold only one large investment, your portfolio may become lopsided, and generate poor long-term results.

A diversified portfolio should include stocks or funds from different industry sectors, such as technology, financial services, and consumer staples.  Diversifying assets across a variety of industries tends to balance an equity portfolio. Often times, while one sector is experiencing poor earnings, another group with different investment characteristics is thriving in the same economic environment.

In addition, a diversified portfolio in today's global business environment should also include both domestic an international investments. The benefit of having a geographically diversified portfolio is that different economies frequently experience ups and downs at different times.

The Importance of Professional Investment Guidance Regardless the performance of the market, the importance of experienced investment guidance and professional equity research cannot be overstated. A qualified financial consultant can assist you with portfolio review and to discuss strategies for achieving you financial goals. By understanding the basics of investing, working with a professional to design an appropriate portfolio, and allowing you investments time to grow, you can invest successfully.

Susan Posey is an Investment Consultant with IJL Wachovia in Columbus, Georgia.  IJL Wachovia, a division of Wachovia Securities, Inc., is one of the nation's largest regional full service brokerage firms, offering a full range of investment services to investors.

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