Asset allocation should be aligned with financial goals and risk tolerance from "summary" of All About Asset Allocation, Second Edition by Richard Ferri
Asset allocation is a critical component of any investment strategy. It involves deciding how to divide your investment portfolio among different asset classes, such as stocks, bonds, and cash. The key to successful asset allocation is ensuring that your investment mix aligns with your financial goals and risk tolerance. Your financial goals are the targets you hope to achieve with your investments. These goals can include saving for retirement, buying a house, or funding a child's education. Your asset allocation should be tailored to help you reach these specific goals. For example, if you are saving for retirement and have a long time horizon, you may be able to take on more risk in your portfolio by investing a larger percentage in stocks. Risk tolerance is another important factor to consider when determining your asset allocation. Risk tolerance refers to your ability and willingness to withstand fluctuations in the value of your investments. If you are uncomfortable with the idea of losing money in the short term, you may want to have a more conservative asset allocation with a higher percentage of bonds and cash. It is essential to strike a balance between achieving your financial goals and staying within your risk tolerance. If your asset allocation is too aggressive, you may be exposed to more risk than you can handle, leading to panic selling during market downturns. On the other hand, if your asset allocation is too conservative, you may not earn the returns needed to meet your financial goals. By aligning your asset allocation with your financial goals and risk tolerance, you can create a portfolio that is well-suited to your individual circumstances. Regularly reviewing and adjusting your asset allocation as your goals and risk tolerance change can help ensure that your investments continue to serve you well over the long term.
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