Pro Series: What is asset allocation and how does it work?

Retirement, education, a new home, a big vacation? What are your financial goals and dreams?

What investments will you choose and what combinations will you select to meet those financial goals? How much time do you have and how risky are you willing to get with you hard earned savings?

What makes your portfolio successful will depend on your objectives and allocation among asset classes. And since timing the markets is impossible, having the right asset allocation can make all the difference in meeting your future needs.

What is asset allocation?

Simply put, asset allocation is an investment strategy. It refers to how you allocate your funds or savings among different investments, for example, how much you would divide savings between stocks and bonds.

There are two interesting points to be considered here. The first is that by spreading your investments among different asset classes, you can manage risk and help lessen the effects of market volatility. An important aspect of this strategy is a long-term time horizon, which means you have time as an investor to ride out peaks and valleys of market cycles.

The second important point is the “smoothing out” effect asset allocation can have on your portfolio. That is to say a diverse portfolio may see losses in one area but may also be offset by gains in other asset classes.

Also read: Pro Series: Understanding the different types of investment risk

With a reduction in volatility, investors may be more likely to stick it out through rough market patches and stay the course for the long term. But everyone is different. There is no one-asset allocation that fits all scenarios. It’s important to talk to your advisor for guidance on your own needs and risk tolerance levels.

Asset allocation and mutual funds

Mutual funds have built-in diversification. By their very nature, mutual funds invest in broad asset categories ranging from low-risk to more risky investments. Ramping up the diversification offered by mutual funds can be done by investing in a variety of funds involving different asset classes and investment objectives.

The more diversified you are the less exposed you are to any one asset class. As a result, economic cycles and slowdowns may affect you less and improve your chances of reaching your goals.

Appropriate allocation, time horizon and goals

Determining appropriate allocation is best done on an individual basis. Whether you are just starting your career, middle-aged or nearer to retirement, will help determine your decisions. Also, risk tolerance and goals will come into play in the allocation decision.

Also read: Investing 101 for young adults: The basics

For example, someone starting their career and opening a retirement account has many years before those funds are needed. As a result, they might consider a more aggressive and risky approach of securities or stocks that can ride out volatility and continue to grow over the long run.

Similarly, someone nearer to retirement who has a more immediate need for their savings would probably consider a more conservative approach that can help preserve assets without the stomach-churning affects of market volatility. This could mean more bonds or money market funds and fewer stocks.

The goal of asset allocation is to create a mix of different asset categories that can provide the potential for satisfying returns at a level of risk that is comfortable for you.

Connected with allocation and time horizon are goals.

If your goal is to save for your child’s college education as opposed to retirement or a new home, your portfolio’s asset allocation will change. A traditionally more aggressive approach often balances a 90% equity allocation with a 10% fixed income or bond allocation.

A moderate approach would be more evenly split and a conservative approach would be more of an 80% and 20% split bonds to stocks, respectively.


Investment portfolios are fluid and need to be rebalanced over time. There is no “set it and forget it” strategy as financial needs and goals, as well as circumstances change.

That’s why it is important to have an ongoing dialogue with your advisor to rebalance your portfolio and ensure it remains in sync with your changing needs and time horizon.

Also read: Procrastination solutions: Start investing like an adult!

The information contained herein is not intended as a recommendation of a specific security or investment strategy. Rather, it is intended to be general and informational in nature. Speak with your Representative to discuss your specific situation and financial goals.

Neither Foresters Financial nor its affiliates provide legal, tax or estate planning services. Should you require such services, you should consult a legal, tax or estate planning professional.

415437 CAN/US (07/17)

0 537
Joel Kranc

Joel Kranc is director of Kranc Communications, a full-scale content and marketing solutions firm founded in 2011 serving a global financial services clientele. He is author of the best selling book Retirement Planning in 8 Easy Steps: The Brief Guide to Lifelong Financial Freedom. He can be reached at