Asset allocation is the way you “weight” investments in your portfolio -- the percentage of your overall investment placed in each category, known as an investment class.
There are three main asset classes: stocks, bonds, and money market securities. Each has its own characteristics in terms of value fluctuation, level of market risk, and potential to outpace inflation. Which asset classes you decide to invest in depends on how your investment time frame and goals match up with the risks and return potential of the various asset classes.
The concept of diversification — the process of investing in different types of funds or securities in order to reduce risk — is an important part of asset allocation. Diversifying among different asset classes increases the chance that as one investment is falling in value, another may be rising. A mix of assets may help position your portfolio to benefit during market upswings, while suffering less during downturns.
If you have sufficient capital, you can also diversify among investment styles to help address risk. Active and passive investing are the two most basic investment styles.
- Active investors and fund managers believe that strategic buying and selling of stocks has a strong potential to outperform the market
- Passive investors and fund managers have greater faith in the long-term success of the overall market and so follow a more general “buy and hold” approach
Active investors are further divided into:
- Growth – typically investing in well-established companies they believe have strong earnings potential
- Value – typically investing in companies that may have fallen out of favor but that they believe will bounce back
Many investors combine investment styles to potentially gain through different market cycles that favor different approaches.
Please consider the charges, risks, expenses and investment objectives carefully before purchasing a mutual fund or exchange-traded fund. For a prospectus containing this and other information, please contact a financial professional. Read it carefully before you invest or send money.
GE 91296 (04/2016)