Allocating your investment portfolio prevents you from putting all your eggs in one basket and minimizes the chances of suffering unnecessary losses. As noted by the U.S. Securities and Exchange Commission, how you diversify depends on how much risk you prefer and whether your investments are for the long or short term.
Stocks have the highest risk and also the highest returns of any investment option. Investment portfolios that have a high percentage of stocks in relation to bonds may have periods of low performance, but they also have higher average annual returns over a long period of time, according to the Vanguard Group. For this reason, a portfolio with a high percentage of stocks is best for investors who want to generate long-term income and are not concerned with short-term returns.
Cash investments have the lowest returns of any investments, but they are the most stable, as noted by the U.S. Securities and Exchange Commission. Cash equivalents to use in your portfolio include savings deposits, certificates of deposit, money market funds and treasury bills. Inflation is the primary concern with cash investments, since dramatic fluctuations in inflation rates can decrease their value. However, they are generally the safest asset category, and chances of losses are very low.
Investment portfolios with a higher percentage of bonds tend to be more stable than those that primarily contain stocks, but they do have more modest returns. As noted by the Vanguard Group, investors who want to reduce risk and invest for the mid- to long-term range may be better of with a portfolio that has a good balance of bonds and stocks. Portfolios that are composed of 70 percent or more bonds are best for short- and mid-term investors.
Although stocks, bonds and cash equivalents are the most common types of assets, there are others that might be beneficial to experienced investors. These investment areas include private equity, precious metals and real estate. Remember that the key to allocating your portfolio is to balance risk and return. Whether you decide to create a conservative or an aggressive portfolio, remember to evaluate its performance regularly and rebalance your portfolio to ensure that your investment needs continue to be met.
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