"Don't put all your eggs in one basket." It’s a timeless saying that can be applied to many facets of life, cautioning that we not commit all our resources to one prospect or venture, else we could lost it all.
Nowhere does this expression resonate more than within the realm of investing. The evolution and expansion of global capital markets over the years have left today’s investors with an increasingly large number of baskets in which to place their financial eggs. An asset allocation strategy can be extremely valuable in helping investors sort through these opportunities and ultimately, make sound investment decisions that are consistent with their financial goals.
What is Asset Allocation?
By definition, asset allocation is a strategy whereby an investor builds a portfolio by combining diverse asset categories (e.g., stocks, bonds, cash) in accordance with his or her specific goals, risk tolerance and investment time horizon. It is a thoughtful and scientific process – specific percentages are assigned to each category – that should be distinguished from the related concept of diversification, which more simply means to distribute a portfolios investment dollars among a variety of investments. In the end, the underlying principle of both practices contends that, on average, a portfolio of different investments will carry lower risk and generate more stable returns than any single investment within the portfolio.
Baskets for your Assets
Before investors can implement an effective asset allocation strategy, they should familiarize themselves with the various “baskets” in which they can put their investments. Among the most common asset classes are stocks, bonds and cash:
Stocks: Generally speaking, stocks have been shown to generate the highest returns among the three primary asset classes over the long-term. Their short-term fluctuations in price, however, produce a high level of market risk (the possibility that the value of an investment will decrease due to shifts in market factors)
Bonds: While bonds also fluctuate in value, they tend to be less volatile than stocks as a considerable portion of their returns comes in the form of income. However, the relative safety and stability of bond investments comes at the cost of more modest returns.
Cash: Cash and cash equivalents, such as Treasury bills, certificates of deposit and commercial paper, entail the least amount of risk, but offer comparatively lower rates of return than stocks and bonds.
To read the full article click here.
Charitable Gift Annuity or CGA: Current low interest rates, coupled with a volatile stock market, have created and atmosphere within which many donors are choosing to invest in charitable gift annuities. This unique giving vehicle provides guaranteed fixed income, generous rates, as well as a charitable income tax deduction.
To learn more about the benefits of a charitable gift annuity, or other ways of making a planned gift send us an email.
