Diversification & Asset Allocation
In order to create an investment portfolio that is unique for you and your individual
needs, you will need to rely on two major principles:
You've heard the term don't put all of your eggs in one basket. The theory of diversification
embraces this age-old saying by imploring you to spread your eggs (i.e. assets)
among various investments or companies. Some key points of this theory include:
- If one investment loses money, the other investments may make up for
- It's not a guarantee against loss, but allows you to help reduce your risk exposure to
a specific type of investment or market condition by not putting your holdings in
Once you've diversified your portfolio, then it's important to consider how you
can allocate your investment options. Asset Allocation is a way of spreading out
your investment options among various asset classes. Some key points of this theory
- Creating a diversified portfolio with a mixture of asset classes is based on your
ability to handle market fluctuation (your risk tolerance) and the amount of time
before you actually need your savings (your time horizon).
- This mixture signifies the percentage of money you put into stocks, bonds, cash
and mutual funds.
- As a general rule of thumb, the higher the risk and the greater the potential reward–and
the other way around.
Understand potential conflicts of interest with mutual fund providers
In choosing the right investments to help ensure you reach your goals, consider
your time horizon (how much time you have before you’ll need your money), the amount
of assets you have to invest and your risk tolerance (how comfortable you are in
weathering the ups and downs of the market).
As the below chart illustrates, generally the higher your risk tolerance and the
more time you have on your side - the greater the possibility there is for a reward.
Below are four possible examples of what your investment portfolio could look like
considering your assets, time horizon and risk tolerance:
Keep in mind, the above examples are for illustrative purposes only and are not
provided as an example for you to create your portfolio. Your individual time horizon,
risk tolerance and long-term goals will dictate your recommended portfolio mix.
A Charter One Investment Services Financial Consultant can help develop a customized portfolio for you that will
encompass a wide array of investment options and is built with your individual risk
tolerance and long-term goals in mind. You can feel confident knowing you are on
the path to help meet your long-term financial goals.