You’ve heard the old saying, “Don’t put all your eggs in one basket.” If you do, you run greater risk of loss. A solution is asset allocation, which can be defined as a means of dividing your portfolio among different investment categories (stocks, bonds, real estate and cash).
Asset allocation can help lessen the volatility of your investment portfolio. Most investments go up and down in value over time, but not necessarily at the same time. Diversifying among market segments and management styles may help to reduce volatility, as each asset class responds differently to certain market conditions. The following are four common behavioral mistakes that you can correct to help improve the overall performance of your investments.
• Investors are often biased toward what they know. Many investors tend to over-allocate in the company stock where they work. This may result in missing out on potential gains and the benefits of diversification. A rule of thumb is to never hold more the 15 percent of any one asset in your portfolio. Personally, I prefer a maximum of 5 to 10 percent in any one asset.
• Emotion wins over rational judgment. It’s a fact that people hate to lose money, and it is this fear of regret that causes investors to hold on to losers too long. Investors tend to hold on to losing investments hoping that they will come back, rather than taking advantage of tax loss selling and letting the losers go.
• Shortsightedness causes imbalance. Many investors tend to view each investment account (401(k), IRA, etc.) separately rather than collectively, which can have a negative effect on asset allocation. It is alarming to an investor when he or she figures out she isn’t as diversified as he or she thought, even though he or she may have two or three different accounts.
• Fixed income maturities. For fixed income investors, make sure investments don’t all mature at the same time. You should ladder your maturity dates over a longer period of time. A properly laddered fixed income portfolio should decrease your reinvestment risk and increase your overall return.
Bottom line, a properly diversified portfolio should help to decrease market volatility and just maybe help you sleep better at night. If you would like help or a second opinion, please give me a call.
Diversification and asset allocation do not guarantee positive results. Loss, including loss of principal may occur. The information in this newsletter is general in nature and should not be construed as tax or legal advice. ICA does not provide tax or legal advice. Please consult your tax andor legal advisor for guidance on your particular situation. The information in this report has been obtained from sources considered to be reliable but we do not guarantee that the foregoing material is accurate or complete.
Investment Centers of America Inc. (ICA), member FINRA/SIPC and a Registered Investment Advisor, is not affiliated with Home State Bank. Securities, advisory services and insurance products offered through ICA and affiliated insurance agencies are*not insured by the FDIC or any other Federal Government agency *not a deposit or other obligation of, or guaranteed by any bank or their affiliates *subject to risks including the possible loss of principal amount invested.
Information provided by Timothy J. Heisterkamp, Investment Centers of America, 115 W. State St. Jefferson; 515-515-386-2570.