Many new investors often prefer to defer to professional stock brokers and investment advisers to determine which investments make sense. Most “newbies” to the investment word figure the complicated process of creating an investment portfolio is best left to the experts. That said, before investing it is a sound practice to research and understand the different options out there – and being able to discuss those options with an investment professional in order to create a more personalized investment portfolio.
Asset allocation is a concept that is important to grasp. In a nutshell asset allocation means dividing up an investment among different categories, such as stocks, bonds, precious metals and cash, according to the Security and Exchange Commission or SEC.
Investments across different asset classes deliver different returns over time. Consider for a moment that over the past 15 years, the price of gold has increased by 315%, roughly the same as the 30-year return for gold. Over the same period, the Dow Jones Industrial Average increased by 58% and the FBNDX returned 127%. It is for this reason that many investment professionals recommend allocating a portion of an investment portfolio or retirement portfolio in precious metals. A silver IRA is a convenient, tax-advantaged investment vehicle for retirement savings.
The SEC says how one decides to parcel out their investments is personal and every investor is different. The way to look at asset allocation is to determine how much can a person afford to invest and how much risk an investor expects to take.
Time Horizon – This means how much time an investor is willing to put in an investment. This could be years or months. People who invest in the longer term might want to take a more conservative investment approach, while those looking a shorter period of time horizon may want a riskier investment that could pay off (or not).
Risk Tolerance applies to how much “risk” an investor is willing to take to see in the short run, large returns.
In a nutshell, the SEC warns that all investments have inherent risk – there is no sure thing. However, understanding the variables associated with an investment will in turn, determine how to divide up the assets.
The SEC advises that investors take a riskier approach in some cases: “If you have a financial goal with a long time horizon, you are likely to make more money by carefully investing in asset categories with greater risk, like stocks or bonds, rather than restricting your investments to assets with less risk, like cash equivalents.”