Now that you have made it through the first half of 2000, it’s time to reevaluate your assets. Experts say that spreading your assets over various investments is perhaps the best rule you can follow. A diversified portfolio should fluctuate less as losses from some investments are offset by gains in others.
Asset allocation is the balance you strike among three investment classes: stocks, bonds and cash equivalents.
- Common Stocks represent ownership in a corporation and entail more risk than other financial assets in the short run. But in the long run, they usually provide the highest returns.
- Bonds are IOUs issued by corporations, government and federal agencies. They typically offer higher yields than cash reserves, but their value can fluctuate with the rise and fall of interest rates.
- Cash Equivalents include money market securities, Treasury bills and short-term certificates of deposit. Money market securities provide safety and liquidity. However, inflation can quickly erode the purchasing power of cash.
For instance, a near-term goal to purchase a house or car may call for a moderate-risk investment approach. A long-term goal like financing a college education or retirement allows you to pursue an aggressive strategy, since you may have time to wait out short-term market fluctuations.
Of course, it won’t matter how much time you have if you pull your hair out and can’t sleep whenever there’s a downturn. For this reason, always weigh your desire for higher returns against your willingness to tolerate market setbacks.