The Importance Of Your Asset Mix

Very few people deny the importance of building and sticking to an asset allocation model. So why do so few people actually live their investment lives by their asset mix? The reasons are numerous and vast. However, there are some extremely important reasons why one should stick to their asset mix over the course of their investment careers. Here are three:

1. Different assets appreciate at different times. Some years, fixed income assets will outperform domestic equities, some foreign equities will outperform domestic equities and so forth. Gains in one asset classes will shift a portfolio's overall asset allocation. What makes the process a touch more complicated is gains in one class and losses in another, distorting the asset mix even more. This requires a fair level of attention on the investor's part. One rule of thumb to make the process a little easier is to make changes to your portfolio every month when there is greater movement in different asset classes (like during periods of high volatility) and every quarter when volatility is low and all assets are moving in the same general direction.

2. The concept of asset allocation is designed to mitigates risks, not enhance gains. Since incorporating an appropriate asset mix is something investors will do in order to reduce risks, it makes little sense to allow a portfolio to get bent out of shape simply for the purpose of enjoying gains as one asset class provides extraordinary returns. In most cases, such returns will correspond with higher levels of volatility, meaning that such gains can easily turn into losses. And such losses can be avoided easily by sticking to one's asset mix.

3. Most asset allocation profiles are based on an investor's tolerance for risk and recommend the highest level of exposure one should have to different asset classes. The reason most investors will instill a proper asset mix in their portfolio has to do with how they deal with the pressure and stress associated with losses. Since an investor's inability to sleep when some assets crash is considered a stress associated with a loss, allowing one's asset mix to become overweight in any given asset class contradicts the purpose of establishing the asset mix in the first place. For investors who are serious about reducing risk, it is essential to stick to the asset allocation you set up, even when it is lucrative to ignore making changes.

These three tips outline the importance of sticking to an asset mix, even when it may seem silly to do. While gains are important, reducing risk is really what investment management is all about. Before you let your asset mix get too bent out of shape, take the steps necessary to set up a process that allows you to review and make changes to your portfolio on a regular basis.

Knowing How To Invest 10,000 starts with knowing your Asset Allocation. Visit MutualFundSite.org for more information.

Chris has more than 17 years of financial services experience. He currently manages a website about Class B CDL Jobs at Class-B-CDL-Jobs.com.

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