Allocate & Diversity
Investors who have time to ride out the inevitable ups and downs of the market tend to concentrate their portfolios in stocks. However, if you're saving for a major but shorter-term financial goal, like paying college tuition, you might be less inclined to put your entire portfolio at risk.
Each asset class reacts differently to different points in the economic cycle. Stocks typically do well when corporate earnings are strong and the markets are expanding. Yet, under these conditions, the bond market is likely to do worse.
It is important to choose an allocation model that best fits your goals and financial situation. When you begin allocating assets within your portfolio, start by choosing the percentage of the total that you'd like to invest in various asset classes.
The moment you invest in the market, the underlying assets in which you are invested will begin to fluctuate in value, for better or worse. You can rebalance your portfolio in a variety of ways, returning it to the allocation you're comfortable with.
As you grow older or your financial situation changes, rebalancing will no longer be sufficient. Instead, investment professionals recommend that you reallocate your portfolio to better fit your new objectives.
One way to measure how much risk you're taking with any particular investment is by looking at its risk premium.
When you've decided on an allocation among the asset classes you've selected, the next step is diversification. The key to diversification is spreading your money among different sectors, industries and securities within a number of asset classes.