The Importance of Asset Allocation

January 31, 2015
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By now, most of you are aware of the recent market volatility. If you watched our Market History video from a few weeks ago, you should know that volatility is something to expect every year of your investing life (despite the unusual lack of volatility the past 3 years).

Please understand that there is a great deal of difference between risk and market fluctuation. Risk, the way we define it, is running out of money before you run out of life or not reaching your financial life goals. Fluctuation is what may occur during the interim. The greatest risk is allocating a portfolio in such a way that it avoids fluctuation but guarantees a return so low it assures that your money will not last and you won’t reach your goals. While a portfolio that invests a larger percentage in stocks may provide more short-term volatility, it may be less risky than the “stable” portfolio.

Risk and Fluctuation are driven in part by the theme of the today’s video: Asset allocation.

Asset allocation gets little attention by the mainstream media. It’s far more important than stock selection but that is what gets all the attention. Academic studies show that your asset allocation is the most important decision an investor can make. The decisions you make as to your mix of assets has a far greater impact on your investing success than does stock picking or market timing.

To be successful over the long-term does not require predictions, but controlling the controllable. How much you save. How long you allow your money to compound. The amount of risk you take (e.g. asset allocation). The amount of taxes you pay. The amount of expenses your portfolio absorbs and finally, your investing behavior.

Having the proper asset allocation helps keep your behavior in check so the market doesn’t beat you like it does to so many investors.

Check out the short video above let me know if you have any questions.