Understanding Asset Allocation….
There are three main classes of assets: equities (stocks), fixed income (bonds), and cash. These assets perform differently over time and different market conditions. It is important to have your investments spread out appropriately given your goals, appetite for risk, and how long you expect to own any particular investment.
If you’re a younger investor, and have time to recover losses from riskier investments, you may allocate more of your savings to more aggressive investments that have larger upside but more risk (the chance of losing money). If the risk pays off you reap a greater reward, if it does not, you have time to recover.
Someone closer to retirement may want a moderate or conservative approach, investing in assets that are less volatile (and therefore less likely to lose money). They may miss some potential gains, but they can worry about losses they do not have time to recover from.
Investment fit can be complex because it is affected by market changes, your stage of life, and changing goals. If an aggressive investment goes well and the gains are reinvested, you may find your portfolio is more heavily weighted to the aggressive side. Alternatively, if an investment with higher risk becomes more stable, you may own the exact same investments, but your overall portfolio may now be more conservative overall.
InvestorKeep tracks investment fit, based on criteria that is specific to you, and lets you know (on average) how aggressive or conservative your investments are. The Fit Indicator on the Snapshot feature of the dashboard shows where your investments rank. Being either conservative or aggressive is not good or bad in and of itself, it just a measure of your risk tolerance and goals. The needle should always point to your agreed upon Risk Profile. If you see the “fit needle” moving, it may be time to ask your advisor about rebalancing. Rebalancing realigns your asset allocation to ensure it is appropriate for your situation.