This is part 2 of the “Withstanding Market Cycles” series on portfolio diversification and asset allocation…some of your best safeguards in times of volatility. For part one of the series “The Benefits of Portfolio Diversification,” click here.
The markets had a volatile start to 2019, reminding us of the importance of a well-diversified portfolio. Determining the right asset mix is a crucial part of this process.
Determining the Right Asset Mix for Your Portfolio
The asset mix determines the level of risk in the portfolio, as well as the long-term return one can reasonably expect.
For example, If an individual has a long time horizon, is very tolerant of risk, and has a primary goal of aggressively growing these assets, then having a greater allocation toward a high-growth, high-risk asset class – like stocks – may make sense. But if an individual has a shorter time horizon, is relatively risk averse, and has a primary goal of asset preservation, then having a greater allocation toward a lower-growth, lower-risk asset class – like bonds – may make sense.
Combining multiple asset classes in one portfolio allows us to mitigate some of the losses associated with the capital markets.