BMO says asset allocation vital in successful investing
BMO Investorline reminds Canadians that one of the keys to successful investing and portfolio management is choosing the right "mix" of assets. Asset allocation is the distribution of money invested in different asset types within a portfolio.
Major asset classes include equities (e.g. stocks and mutual funds), fixed income ( e. g. bonds, guaranteed investment certificates) and cash investments; other investment categories can include real estate, precious metals and commodities.
Studies have shown that properly proportioned asset allocation can have a significant impact on an investor's success, said Viki Lazaris, President & CEO, BMO InvestorLine. While stocks have been the best performing asset class over the long term, they have also been the riskiest. It's important to choose a mix of investments that fit with your financial goals, time frame and risk tolerance.
Know Your Investing Timeframe: If you have a longer investing timeframe, consider putting a significant percentage of your funds in equities. Stocks typically have the best potential for earning returns that outpace inflation and other investments, and, even if markets decline, your portfolio will have time to rebound. If, however, you do not have a long time horizon (e.g. fewer than 5 years), consider a portfolio that consists of more short-term bonds and cash investments.
Diversify: No single investment class will perform well all the time; to mitigate your financial risk, allocate funds to more than one asset class. Fixedincome investments, such as bonds, may help cushion your portfolio if stock values drop. Consider a mix of short-, medium- and long-term bonds.
Define Your Goals: Your portfolio is a tool to help you achieve your financial goals. Determine what your end goal is and proportion your assets accordingly. To preserve capital and generate income, your portfolio should have a higher allocation in fixed income investments such as bonds and guaranteed investment certificates (GICs).