Asset allocation is used to distribute your investable assets among a variety of investment categories. This process will:
- Reduce overall investment risk
- Create more reliable investment forecasts
- Improve the risk/return tradeoff of your portfolio
Accumulation planning also involves the choice of securities for your investment portfolio. Common securities are stocks, bonds, and mutual funds. Separately managed accounts, exchange traded funds, option strategies, short-term assets, and annuities are also considered to optimize a portfolio.
Alternative investments may also be an option for the right investor. One of the premier benefits of alternative investments is non- correlation of traditional investment tools. Added diversification occurs from the inclusion of alternative investments that may react differently to the markets than traditional investments. Managed futures, commodities, hedge funds, oil and gas, tax shelters, and real estate are all examples of alternative investments.
Some situations require different expertise than typical stock and bond portfolio implementation. These situations usually pertain to employer-related retirement plans and stock options, margin strategies, and real estate exchanges.
Most investors understand that as risk increases, the potential for return also increases. But there is a point for every individual where the level of risk is not worth the potential return. The goal of asset allocation is to provide you with the risk/return scenario that is most comfortable for you.