Investing 101: What is Asset Allocation?

The financial world comes with plenty of jargon and an endless supply of acronyms. If you aren’t regularly exposed to financial words and phrases, it can seem like a totally different language. To avoid feeling out of the loop on your finances, it’s important to stretch those mind muscles and stay informed.

For example, very financial advisor talks about asset allocation, but what does that really mean  – and how can it help you make more informed decisions about your money? In today’s blog, we’ll cover the basics of asset allocation, as well as tips to help you find your unique asset allocation balance.

What is Asset Allocation?

In simple terms, asset allocation means that we try to make sure your stocks, bonds, exchange traded funds and mutual funds are set up to maximize the different asset classes in a way that gives you returns without risk you can’t handle. Too many people buy mutual funds and stocks and lose sight of the type of asset classes they own.

Most common asset classes for stocks are Large Cap (capitalization or market value greater than $10 billion), Mid-cap (medium size or market value between $2 billion to $10 billion) and Small Cap (small size or market value less than $2 billion). There are also developed international stocks (Europe, Canada, Australia) and emerging market international stocks (Brazil, China, India, etc.).

Then there are the alternative markets (like real estate and commodities). For bonds there are short term (less than 2 years to maturity), intermediate (longer than 2 years but less than 10 years) and long-term (over 10 years to maturity).

In plain terms, asset allocation is your unique mix of investments.

How to Find the Right Balance of Assets

Think of it as a large garden salad. Too much of one thing can overpower the taste and change the nature of the salad. But the right mix of ingredients and dressing can enhance your experience and leave you wanting more.

If you only ever invested in Tesla, and the stock suddenly plummeted or the business closed down, you would be out all of your money. A diverse asset allocation helps prevent that scenario.

Your “salad” shouldn’t just be a jumbled mess of every type of investment, however. To optimize your asset allocation, you would ideally work with a financial advisor, discuss your goals and build a plan to optimize your investments in a way that reflects your best outcomes.

Learn More with Clarity

Our advisors can help you better understand your relationship with money – and create a plan for the future. Click here to schedule a consultation with Clarity Wealth today.


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