How Does Your Investment Garden Grow?
Apr 08, 2014
Getting ready to plant your garden now that the weather is warmer? Before you start, you’ll have to choose the kinds of plants you want and where they will go in your yard. You can’t just throw all the seeds on the ground and hope for the best.
Choosing what portion of your total portfolio to invest in different asset classes — a process called asset allocation1 — is a lot like planning a garden. Each major asset class — stocks, bonds, and cash — has different risk characteristics. Selecting the right mix of investments to fit your objectives, time frame, and risk tolerance can have a big impact on whether or not you reach your financial goals.
Plant for Growth
If you’re investing for the long term and have several years until you’ll need your money, you may want to devote a large percentage of your portfolio to equity investments. In fact, you should consider putting some money in stocks even if you’ll need your money sooner. Although stocks are volatile, they offer the greatest potential for inflation-beating returns and, historically, have generally outperformed other investment types over the long term. Selecting a variety of stock types, such as foreign and large-, mid-, and small-cap stocks, from several different sectors of the economy will help diversify1 your portfolio.
Add Some Contrast
To help manage risk, consider diversifying beyond stocks. Fixed income2 investment values often move in the opposite direction of stock values and may help cushion your portfolio against major losses when stocks are not performing well.
Cash for Color
Cash investments,3 such as Treasury bills, help you invest for short-term goals and can easily be converted to cash in an emergency. But keep in mind that rates of return on cash investments are typically low and may not keep pace with inflation.
1 Asset allocation and diversification do not guarantee a profit or protect against losses.
2 Prices of fixed income securities may fluctuate due to interest-rate changes. Investors may lose money if bonds are sold before maturity.
3 Cash alternative investments may not be federally guaranteed or insured and it is possible to lose money by investing in cash alternatives.