Asset allocation. Two words with a huge impact on your investment goals. In the current economic environment and with a volatile stock market, you may be tempted to rush into any investment with promising returns. But before risking your long-term goals, reconsider the best decision you can make to see you through these dark times with minimal damage.
A Vanguard report, "Recessions and balanced portfolio returns," shows that returns of a balanced portfolio made up of 50 percent equity and 50 percent bonds have been statistically equivalent in times of economic recession or expansion since 1926. It concludes that a plan focused on a diversified, long-term, strategic asset allocation is appropriate regardless of the timing of recessions.
Your financial plan might not be 50-50, but it should be based on your personal investment goals, risk tolerance and time horizon. Seth Masters, chief investment officer for asset allocation at AllianceBernstein, says sticking to a portfolio that was designed with your goals in mind is the only way to survive market volatility. He likes to use this analogy: "A lot of people are nervous in an airplane. If, at a moment of turbulence, you run for the doors, you can't expect you'll do any better than if you stay on the plane." After all, you got on the plane in the first place, believing it was a reasonably safe way to get to your destination.
The goal of a balanced portfolio (made up of safer, lower-returning assets along with riskier, higher-returning asset classes) is not to deliver total returns that are positive all the time. The goal is to get you where you're going. It's only natural that some asset classes will be up when others are down but on balance, your portfolio will move toward safety as you get closer to retirement and can't afford the time to make up significant losses.
During chaotic times like these, "we see a lot of people panic and get into cash or buy gold," says Masters. While those assets may have a place in a balanced portfolio, if you act on panic and swing away from your original allocation, you could be in for returns that won't keep up with inflation, or a precipitous fall if the value of gold drops. Sometimes slow and steady really does win the race, so use this asset allocation calculator to help put you on the right track.
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