Investment Strategies

Asset allocation is the way you divide your investments among broad categories such as stocks, bonds and cash. Research and long experience suggest that this mix, more than the choice of any single investment, drives most of the difference in how a portfolio behaves over time. No allocation guarantees a return, but a thoughtful one can help you stay invested through good and bad markets.

The main asset classes

• Stocks offer higher long-term growth potential with larger swings in value.
• Bonds generally provide income and more stability, though they carry interest rate and credit risk.
• Cash and equivalents offer safety and liquidity but little growth, and may lose ground to inflation.
• Real estate and other assets can add variety, along with their own risks and costs.

What shapes your mix

1. Time horizon: Money you will need soon belongs in steadier investments. Money you will not touch for decades can usually tolerate more volatility.
2. Risk tolerance: Be honest about how you would react to a large drop. An allocation you abandon in a panic does you no good.
3. Goals: Retirement, a home purchase and a child's education may each call for a different mix.
4. Income and needs: Stable income and strong savings let you take more risk than a thin cushion would.

Diversify within each class

Within stocks, spread holdings across company sizes, industries and regions. Within bonds, vary maturity and issuer type. Broad index funds and mutual funds make this easier and cheaper than buying individual securities. Beware of concentration in a single stock, including your employer's.

Rebalance on a schedule

Over time, the investments that grow fastest take up a larger share of your portfolio, which raises your risk without your deciding to. Rebalancing means trimming what has grown and adding to what has lagged. Many investors do this once a year or when a category drifts past a set range. In taxable accounts, selling can trigger capital gains, so consider rebalancing with new contributions or inside retirement accounts first.

Revisit as life changes

Your mix should shift as you approach goals, change jobs, marry, have children or retire. Review it at least annually.

Where to hold what

Tax treatment differs by account type. Investments that produce taxable income are often better placed in tax-deferred accounts, while those with long-term growth may suit taxable accounts. The right placement depends on your situation.

Investor education is available at investor.gov. For help coordinating your allocation with your tax picture, contact our firm.