Understanding Asset Allocation
What is asset allocation and why is it so important? Simply put, asset allocation is a strategy for achieving your financial goals by spreading your assets among different types of asset classes and investment options. How you choose to distribute your assets is probably one of the most important aspects of achieving your goals. A well-known 1991 study*, which still holds true today, shows that 91% of an investment portfolio's performance is determined by the allocation of its assets - not individual investment selection or market timing. This means that asset allocation isn't just a sound idea for building and protecting your retirement savings, but a key element in achieving your retirement savings goals.
The Importance of Asset Allocation in Portfolio Performance
 Asset Allocation 91%
 Investment Selection 5%
 Other Factors 2%
 Market Timing 2%
*Study conducted by Brinson, Singer & Beebower.
What is the ideal asset allocation mix?
When it comes to planning for retirement, following a sound asset allocation strategy for the long-term is wise. Attempting to invest in the hottest asset class of the moment may actually result in lower returns over the long run. This year's winner could easily be next year's loser. Once you've made your asset allocation decisions, stick to them. Below is a chart that illustrates how asset classes can move in and out of favor from year to year.
When should you revisit your asset allocation strategy?
While the asset allocation strategy you develop today may be ideal for you currently, it is important to remember that life changes (such as financial status, marriage, family additions, etc.) may also cause changes in your investment needs. Revisiting your asset allocation mix from time to time is a good practice. An annual review should be sufficient to keep your investment strategy in line with your retirement goals.
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