Keeping a portfolio with a healthy mix of assets that are properly diversified may allow you to weather market shocks more easily.
5 Models to Help Diversify Your Portfolio
You’ve probably heard “No risk, no reward” used to describe countless personal and professional scenarios. When applied to investing, that phrase has a specific definition. It describes the correlation between the amount of risk you’re willing to accept in your portfolio and the potential for long-term return. High risk may yield higher returns over time, but it also can expose you to dips in the value of your portfolio.
When you’re looking at your investment plan, you might consider reviewing a range of model portfolios from conservative to aggressive, and then choose one based on your tolerance for risk and expected time in the market. Once you’ve selected a model portfolio, you can create a general framework to align your financial goals with your life goals.
In general, an asset allocation model can cover a range of investment styles, from conservative to aggressive. For example, a model might contain a mix of three broad asset categories (among others):
- Equities (mostly stocks)
- Fixed-income (mostly bonds)
Model Asset Allocation Portfolios
- Conservative. As the name implies, this portfolio is heavily invested in what is considered to be risk-averse assets – cash and fixed-income securities. No return is guaranteed, but this approach could help minimize volatility, or the up and down swings of your portfolio. However, your returns may also underperform higher risk portfolios over long periods of time.
- Balanced. This model focuses on potential stability through a portfolio invested in equal amounts of fixed income securities and equities. Like the conservative model, the lower volatility may also limit the overall long-term return compared to a portfolio with higher risk.
- Moderate Growth. Your portfolio aims more toward long-term capital appreciation, but still has elements of risk-averse cash and fixed income assets. The range of possible outcomes over longer periods can expand from the conservative and balanced models, but may underperform returns from higher-risk alternatives.
- Growth. By investing primarily in equities, this model seeks long-term capital appreciation while potentially avoiding the riskier areas of the market. However, significant short-term fluctuations in value can be expected. Any return could vary widely, but by accepting sizeable risk and volatility, your portfolio may outperform a more conservative approach.
- Aggressive. Prioritizing a maximum return, this model is almost entirely invested in equities and includes exposure to potentially risky market areas. Aggressive investors accept the possibility of large short-term fluctuations and even possible longer-term losses to potentially outperform more conservative investing styles.
As a starting point, Scottrade’s Portfolio Review Tool gives you 5 choices – or Target Models – to consider.
“Outside of time and risk, keep in mind that certain life events can dramatically alter your financial plan,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “Saving for a wedding, a home and children are just 3 common examples of situations that can change your ability to invest and your appetite for risk.”
Question: How do you determine your asset allocation today?
Keep in mind that while diversification may help spread risk it does not assure a profit, or protect against loss, in a down market.
Bonds involve risks including, but not limited to interest rate risk, reinvestment risk, inflation risk, call risk, liquidity risk, credit risk, market risk, default risk, event risk, and a risk of loss of principal. New issue offerings are sold by prospectus or offering circular available at www.scottrade.com. Investors should read these carefully.
The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.
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Before you can achieve success in your financial portfolio, you should consider setting clearly defined investing goals.
Scottrade Brokerage President Peter deSilva was drawn to the firm by its client-first approach. This approach was demonstrated with the company named “Highest in Investor Satisfaction with Self-Directed Services” by J.D. Power.