Spreading your money across various types of investments is called diversification. Asset allocation is a strategy to help you effectively diversify your portfolio among asset classes, including stocks, bonds and cash/money markets. Your allocation strategy is an important factor influencing your portfolio´s return, perhaps even more important than the actual securities selected.
Choosing your asset allocation model
Your strategy or model should depend on whether your primary need is to produce income or to grow the value of your investment. For example, a retirement portfolio will not need to produce income until you retire. Therefore, depending on your tolerance for risk and time frame, your model might focus on growth until you are near retirement. This situation might call for an aggressive growth model with 60% of your portfolio in stocks, 30% in bonds and 10% in money markets.
After retirement, you might shift some of your stock allocation into bond or money market holdings to provide the income stream you will need. You might keep some portion of assets in stocks in seeking growth to help outpace inflation and to help fund your later years.
Refining your model along the way
Your asset allocation should change as you reach different stages in your life or as you approach your goals. The key considerations will be the level of risk you are willing to take on, the rate of return you require and your investment time horizon. With this information, you can develop a personal model with the goal of minimizing risk and helping you to meet your goals.
Your Financial Advisor can recommend an allocation model that meets your individual goals and circumstances and help you refine it as needed.
C2003 Morgan Stanley
Morgan Stanley and its Financial Advisors do not offer tax or legal advice. Consult your tax or legal advisor before making any tax- or legally related investment decisions. This article is published for general informational purposes only and is not an offer or solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your individual circumstances and objectives.