Answering: What is Asset Allocation?
Asset allocation is a fancy term that generally means how much you have in stocks and bonds. It can be broken down further to list out the types of stocks and bonds you have.
In general, the percentage of stocks you have in your portfolio will determine the amount of risk you are able to take. If you have 100 percent invested in stocks, you may average a higher long-term growth rate but be subject to fluctuating account balances based on different world events. If you add to your accounts each month, you are dollar cost averaging. This means that you are buying sometimes when prices are high and sometimes when prices are low, but over time you are buying at an average price.
| Large Cap Value | Large Cap Growth | Mid & Small Cap | International |
|---|---|---|---|
| Berkshire Hathaway Inc. | Microsoft | Domino's Pizza | Nestle |
| J.P. Morgan | Amazon | Five Below | Novartis |
| Bank of America | Toro | Roche | |
| Apple | Alphabet | Dunkin' | HSBC |
| United Health | Visa | Brinks | Toyota |
| Chevron | Cisco | Mattel | Royal Dutch Shell |
| Walmart | Verizon | Six Flags Entertainment | SAP |
| AT&T | Pfizer | Energizer | Unilever |
Having 100 percent in stocks may classify you as having aggressive growth, while a portfolio of 60 percent in stocks and 40 percent in bonds may categorize you as having a moderate portfolio. Your long-term return might be lower in a moderate portfolio, but the value of the portfolio may not fluctuate as much each month.
Listings for different style boxes of stocks are often described as large cap, mid cap, small cap, and international. This represents how big each company is in a given sector. A large cap company, for example, is a company whose market capitalization is over $10 billion. Remember, each of these sectors represents actual companies, so when you see stock market swings, you can associate the volatility with the fact that these are actual businesses changing and adapting to business cycles. Whether their stock is up two percent or down two percent in a given day, it will probably not cause them to change their business strategy.
The most important thing to remember is to set your asset allocation and not change it frequently based on where you think the market is headed. This is referred to as market timing, and it requires you to “be right twice” by knowing the right time to buy and the right time to sell. If you are a long-term investor, short-term fluctuation smooths out over time.
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