It's the Investment Mix That Matters

KENTWOOD, Mich. - Oct. 29, 2015 - PRLog -- With investing, one of the most critical decisions is how much to invest in stocks versus bonds. That mix, which is frequently called your asset allocation, is crucial because it determines about 90% of your long-term investment performance.*

Select the Right Combination

Every investment has a trade-off between risk and return. Putting more of your portfolio in equities (stocks) has meant higher returns over time but bigger swings (up and down) in your portfolio’s value. On the other hand, a portfolio with less in stocks has generally had lower returns over time, but the ride was also less bumpy along the way. Your comfort with risk and the timing of your long-term financial goals should determine the mix of stocks and bonds that’s appropriate for you.

Construct with Care

Carefully constructing your portfolio involves understanding how different investments work together, as well as many decisions, such as how much to invest internationally, which types of stocks and bonds to include, and how to own them.

What to Own

The foundation of your equity portfolio is large-cap U.S. and foreign stocks (stocks of large companies). Then, add mid-and small-cap stocks and real estate securities, since they can behave differently from large-cap stocks. You may want to include commodities or emerging markets for additional diversification.

Similarly, U.S. investment-grade bonds and cash are the base of your fixed-income portfolio. You may want to consider including high-yield bonds and international bonds for additional diversification.

How to Own Them

Many investors prefer to own individual stocks and bonds. Others want the built-in diversification from mutual funds, ETFs and UITs, as well as professional management in some cases. There’s no right answer – it depends on you. But remember – regardless of how you choose to own your investments, combine them carefully and appropriately for your situation and review them regularly.

If you’re like many investors, you may spend a lot of time on individual investment decisions. But don’t forget the bigger picture of how each investment fits with the others. Review and regularly maintain your portfolio’s overall construction with your financial advisor – making sure you have the right mix of investments that work together to help you achieve your goals.

Important Information:
* Source: “Determinants of Portfolio Performance II: An Update,” Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal, 1991.