Asset allocation is crucial for diversification from "summary" of Common Sense on Mutual Funds by John C. Bogle
Asset allocation is crucial for diversification because it is the primary determinant of the risk and return characteristics of a portfolio. By spreading investments across different asset classes, such as stocks, bonds, and cash, an investor can reduce the overall risk of their portfolio. This is because different asset classes have varying levels of risk and return, and by combining them in a strategic way, an investor can create a more balanced and diversified portfolio. A well-diversified portfolio can help protect against the volatility of individual securities or sectors. For example, if one sector of the economy experiences a downturn, having investments in other sectors can help offset potential losses. This is known as "spreading your bets" and is a key principle of successful investing. Furthermore, asset allocation is important because it allows investors to tailor their portfolios to their individual risk tolerance and time horizon. Younger investors with a longer time horizon may be able to take on more risk in pursuit of higher returns, while older investors nearing retirement may prefer a more conservative approach to protect their savings. In addition, asset allocation can help investors capture the benefits of diversification while still seeking to achieve their financial goals. By combining assets with low correlation to each other, such as stocks and bonds, investors can potentially reduce the overall volatility of their portfolio without sacrificing potential returns.- Asset allocation is a critical component of a successful investment strategy. By carefully selecting a mix of asset classes that align with their goals and risk tolerance, investors can build a well-diversified portfolio that can weather market fluctuations and help them achieve their financial objectives.
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