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Asset Allocation – Balancing the Risks of Investing

Studies have found that, over the long run, how your investments are allocated is more important than individual investments in determining overall performance for diversified portfolios.

That’s right. It’s not necessarily the specific investments you choose, but how those investments are allocated that may make the difference in reaching your financial goals.

Furthermore, the process of selecting an appropriate investment mix encourages you to organize your investments and consider your financial needs and risk tolerance, as well as external factors such as inflation, taxes, interest rates and the current economy.

Asset Allocation Versus Diversification

On the surface, asset allocation may sound very similar to diversification. Indeed, the principles are closely related; both are designed to reduce risk in your portfolio.

At its most basic, diversification means spreading money among several different investments.

By diversifying into a variety of alternatives, you can mitigate the chances of suffering a catastrophic loss should one of the investments perform poorly.

Asset allocation takes this principle one step further by diversifying your portfolio not just among different investments, but among different investment classes: stocks, fixed income alternatives such as bonds, cash equivalents, and real estate and other tangible assets.

Every investment involves some level of risk. Even CDs – traditionally considered “secure” because, unlike other investment securities, they offer a fixed rate of return and are insured – carry the risk that the rate of return received may not be enough to outpace inflation and taxes. Given that some degree of investment risk is unavoidable, your goal should be to maintain, and ultimately increase, your investment returns while managing the risks.

Asset allocation does not eliminate risk, but it can reduce your exposure to extreme highs and lows in performance. Effective asset allocation can also help preserve capital, increase liquidity and decrease portfolio volatility.

It’s Part of Putting You First

At Raymond James, we are dedicated to putting each client’s financial well-being first.

That’s why we listen. Only after listening to your needs and goals for the future can we recommend a tailored asset allocation strategy.

Once we have a mutual understanding of your financial goals, the first step is to organize your assets into four basic categories: stocks, fixed income, cash equivalents, and real estate and other tangible assets. This enables us to review your portfolio’s existing allocation in relation to your current needs and objectives, revealing areas that might require special attention, including changes that may protect and strengthen the portfolio. The result is an overall picture designed to help you attain greater control over your investment plan. Furthermore, the asset organization process also enables us to supply a comprehensive listing of your current investments upon request. This list can be extremely useful for tax preparation, among other things.

The next step is to create an asset allocation model designed specifically to help meet your individual needs. This model, when compared to your existing allocation, can help identify potential shortcomings while providing an understanding of how they can be turned into strengths.

At this point, we will discuss possible adjustments to or restructuring of your portfolio to meet the parameters established by your new asset allocation model.

Once we have created and implemented a specific model, quarterly reviews help ensure that the portfolio is on track and provide opportunities to discuss any changes that may be appropriate.

The Raymond James Investment Policy Committee

Among the asset allocation models available for use are those published quarterly by the Raymond James Investment Policy Committee, which includes professionals who represent a cross section of investment disciplines. The committee considers current economic and market conditions and national and international events – as well as interest rates and investors’ ages and income levels – to develop conservative recommendations for a percentage of assets in each of the four investment categories.

These recommendations can be useful as a basis for comparison when developing individual asset allocation models.

Asset Allocation Means Service

Asset allocation enables us to work together more efficiently as a team while offering an established procedure to follow when organizing and planning investments. In addition, it is specifically designed to provide you with a greater understanding of your portfolio. Ideally, this increased level of knowledge will lead to greater comfort with the investing process. These recommendations can be useful as a basis for comparison when developing individual asset allocation models.

Asset allocation is designed to help you benefit from:

  • Reduced risk'
  • Preservation of capital'
  • Increased liquidity'
  • Quarterly updates'
  • A portfolio structured to work efficiently under changing market conditions and
  • An organized listing of assets.