Investment Strategy: Interpreting key concepts and choosing appropriate strategies

Investment Strategy: Interpreting key concepts and choosing appropriate strategies

Strategic asset allocation
Build a strategy designed for your needs, and stay committed to it. 
Asset allocation is the single most important factor in assessing the long-term 
risk-and-return characteristics of your portfolio. Research shows that the strategy 
of selecting the percentage of stocks, bonds, and cash in a portfolio can be said 
to be responsible for more than 90% of the variability in portfolio returns.2
Poor asset allocation decisions can cause the returns of the average stock or bond 
investor to lag the respective markets. You should allocate your investments across 
stocks, bonds, and cash to help reduce portfolio risk, seek attractive returns, and avoid 
the pitfalls of market timing. In addition, investors with longer time horizons have the 
capacity to accept a higher level of portfolio volatility associated with a more significant 
weighting in equities, which should include broadly diversified international funds to 
take advantage of diversification benefits outside the United States.
Determining your asset mix.
Your time horizon, current financial situation, and risk tolerance for market swings will 
influence how aggressively or conservatively you choose to invest.

Consider portfolio diversification and select your target asset mix.
Portfolio diversification is the mix of stocks, bonds, and cash held in a portfolio. One 
way to help protect yourself from the unpredictability of the market may be to diversify 
your holdings across these three main types of investments. This approach can help 
lower the risks associated with having all your money in only one type of investment.
Your asset mix depends largely on your specific financial situation. Typically, a longer 
investing time frame allows for a higher percentage of stocks in your portfolio. If you are 
near retirement you may want to consider a gradual process of transitioning into a lower 
volatility asset mix. Keep in mind that retirement for some investors could last 30 years or 
longer, so the growth potential of your portfolio should still be an important consideration 
when selecting your investment mix.

Investment Strategy: Interpreting key concepts and choosing appropriate strategies