Many investors probably feel like the stock market has been as colorful as this year’s fall foliage. If you’ve watched stock ticker symbols on a computer screen, you would have seen green turn red as some stocks had more sellers than buyers. Many sectors even experienced more volatility than they have in previous years. Another factor: sector rotation-the substantial increase in trading volume as investors are moving from one group of stocks to another. As a result, a sector that may have been up earlier in the year could drop in the fourth quarter of the year. Technology, financial services, and biotech stocks are examples of equities that gained a huge amount of media attention when investors adjusted their allocations in these sectors.
This year, volatility and sector rotation has re-emphasized the importance of having a diversified portfolio and a long-term perspective. Asset allocation makes the task of diversification easier for long-term investors and the following models are examples that can be adjusted according to your changing needs. The pie charts illustrate how three different hypothetical investors might allocate their investments based on their goals and tolerance for risk.