DEFINITION:
The process of dividing your investments among different asset classes (such as stocks, bonds, and cash) to balance risk and reward.
WHEN AND WHY IT’S USED:
Asset allocation is used when constructing an investment portfolio to ensure that risk is spread across various types of assets. By selecting different asset classes, investors aim to protect their portfolios from market volatility, since different assets often react differently to the same economic events. This strategic distribution helps in managing risk while pursuing growth and income simultaneously.
IMPORTANCE IN COMMUNICATION:
Discussing asset allocation with your advisor is crucial because it lays the groundwork for your overall investment strategy. A clear understanding of how your assets are distributed helps you grasp why certain decisions are made and how they can protect your wealth in various market conditions. It bridges the gap between technical strategy and your personal comfort level with risk.
Additionally, clear communication about asset allocation builds trust and transparency. It ensures that you and your advisor are on the same page regarding investment choices and that any adjustments are made in light of changing market conditions or personal circumstances. This ongoing dialogue is key to maintaining a portfolio that meets your evolving financial needs.
EXAMPLES IN CONVERSATION:
“Can you explain how my asset allocation is structured?”
“How might changing market conditions affect our asset allocation strategy?”