A sound investment strategy is critical to helping your money grow and, ideally, outpacing inflation.
However, if you're like many people, you may not have the time or the inclination to analyze how different
investments or securities may fit into your portfolio.
The steps below can help guide you through the investment planning process.
Clarify Your Investment Goals
Before you invest your money, it's important to identify and prioritize your financial goals, assess your
risk tolerance and understand your investment options. A financial advisor can help you sort through your
options and invest appropriately. Some questions to consider:
- What needs and dreams are you saving for? Retirement, a home,education?
- When will you need the money you plan to invest now?
What is your risk tolerance? Are you willing to invest in stocks that may rise and fall in value in the
short term, but have the potential to deliver larger returns in the long run? Or would you feel better if
your money were invested more conservatively?
Do you understand how different investment vehicles (stocks, bonds, mutual funds, real estate, etc.)
work? And the potential tax impact of each?
Once you’ve identified your investment goals, you can begin to create an investment strategy that best fits
Develop an Investment Strategy
When it comes to investment strategies, working with a financial advisor can ease the process by helping
- Assess your financial situation. Create a clear picture of your current financial
situation, including analyzing your investment timeframe and your risk tolerance.
- Understand investing options. Make decisions that are right for you by gaining
knowledge on different investment types and accounts.
- Apply diversification. Invest in a variety of assets to distribute and help reduce
- Allocate your funds. Spread your investments among different asset categories,
including stocks, bonds, cash and real estate, a process known as asset allocation. This also helps dilute
- Monitor your progress. Revisit and re-allocate your portfolio regularly to make sure
your investments are still aligned with your current needs and future goals.
- Consider tax implications. Be aware of tax advantages as well as tax consequences so
you can avoid paying unnecessary fees.
Guide to Risk Tolerance and Asset Allocation
The foundation of your investing strategy is your comfort with risk. Once you understand your risk
tolerance, you can allocate your assets accordingly.
As you approach retirement, your asset allocation strategies will change, and you may want to make
adjustments to help protect you from market risk while retaining potential for growth.
In retirement, your asset allocation needs to generate income from your savings while growing your
Whether you're just starting to invest for retirement, or have a substantial amount set aside, the
foundation of investing is understanding your comfort with risk, adjusting the mix of assets in your
portfolio and diversifying your investments within it.
As you near retirement, you may want to assess your comfort with risk, adjust the mix of
assets in your portfolio accordingly and select a diverse range of investments to help protect your
portfolio from market volatility and prepare you to live off your savings.
Once retired, your focus shifts from saving to generating income from your savings in
retirement. You'll want to re-assess your comfort with risk, determine if a different mix of assets is
appropriate, then select the investments that best align with your needs.
Assessing your risk tolerance
In general, investments that have potential to generate higher returns are also more risky. Only you can
decide how comfortable you are with that trade-off. The more time you have to save, the more likely it is
that undertaking a little higher risk can pay off.
As retirement approaches, you have less time to recover from market losses. While it may be tempting to
avoid risk completely, you still have time for your assets to grow, and should consider taking advantage of
Once you retire, your comfort with risk may be lower than it was during your working life. However tempting
it may be to avoid risk completely, you may still need to have some assets in growth-oriented investments to
give your dollars the potential needed to outpace inflation and to last throughout retirement.
Risk tolerance categories
I am willing to accept the lowest return potential in exchange for the lowest potential fluctuation in my
account value even if it may not keep pace with inflation.
I am willing to accept a relatively low return potential in exchange for relatively low fluctuation in
I am willing to accept a moderate return potential in exchange for some fluctuation in account value.
I am seeking a relatively high return potential and am willing to accept a relatively high fluctuation and
potentially substantial loss in my account value.
I am seeking the highest return potential and am willing to accept the highest fluctuation and could lose
most or all of my account value.
Revising your asset allocation
Once you understand your risk tolerance, you can construct your asset allocation — the mix of investments
in your portfolio. As you approach retirement, your asset allocation strategies will change, and you may
want to make adjustments to help protect you from market risk while retaining potential for growth. In
retirement, your asset allocation needs to generate income from your savings while growing your overall
Diversifying your portfolio
Once you select your asset allocation, you need to choose the investments within it. The goal of
diversification is to invest in a range of products such as cash vehicles, bonds and stocks, or mutual
funds, so that your assets are spread over many unrelated companies, industries and regions. Diversification
is an important strategy that can help reduce risk in your portfolio. While some of your investments may
lose value, those losses may be offset by gains in other investments.
Determining your risk tolerance, constructing an asset allocation and diversifying your underlying
investments can be a complex process.
Asset Allocation and Diversification for Long-Term Investing
Asset allocation and diversification are time-tested investment strategies that can help you achieve
your financial goals.
Both are important considerations to helping you enhance return potential and mitigate risks over the
long term, across periods of market movement and all phases of the economic cycle.
Work with your advisor to build asset allocation and diversification strategies tailored to your
financial goals, time horizon and risk tolerance.
Asset allocation is a process through which you select a mix of investments that are
appropriate for your financial goals, risk tolerance, time horizon and tax situation. It can help you
generate returns for a given level of risk and preserve capital — regardless of market conditions — by
spreading investments in your portfolio across asset classes such as stocks (equities), bonds (fixed
income), alternative investments and cash.
In addition, asset allocation can help you mitigate risk, given investments that offer higher potential
returns tend to be riskier than investments that typically deliver more moderate returns.
To stay aligned to your asset allocation approach over time, it’s also important to regularly rebalance
your investment portfolio with your advisor. For example, if the stocks in your portfolio have increased in
value, you may wish to sell some and use the gains to purchase more bonds.
Diversification is a way to take your asset allocation mix to the next level. Diversification is about
balancing your investments across asset classes and within asset classes. A well-diversified portfolio can
Capture attractive gains from outperforming segments of the market. A portfolio of investments across a
variety of asset classes, industry sectors, regions, management methodologies, risk profiles and goals may
help you preserve and grow your assets over time. This is because having exposure to a wider array of
investments can enable you to benefit from outperforming segments of the market over time.
Reduce portfolio volatility. Diversification can help moderate short-term spikes and dips in your
portfolio’s value, creating a more balanced or consistent long-term performance path. If one of your
investments loses value, gains from another investment in a different sector can help offset the loss.
Mitigate downside losses. Since money is distributed across asset classes and investment types that
typically perform independently of each other, a drop in the value of any single asset can do less harm to
your portfolio’s total value. When losses are limited, your portfolio may be able to bounce back more
quickly from downturns.
Make objective decisions. As you watch your portfolio’s progress over time, keeping market ups and downs
in perspective can be easier said than done. Your advisor can help you determine when action is needed,
based on your diversified, goal-based investment strategy.