Keeping Your Balance: Lowering Volatility and Managing Risk

Oct 15

Determining the right investment plan for you usually comes at the end of your financial planning process. After an extensive review of your current situation, assets, debt, income, and future goals, the final step is to select the correct mix of investments. This is your asset allocation, and it is designed to keep your plan on track, whether that means saving for the future and enjoying your lifestyle now or creating current and future income in retirement. It combines two factors:

• Your risk tolerance
• Your time horizon

But you aren’t finished once you’ve identified your time horizon and selected asset classes that, in combination, reflect your desired risk profile. While the overall investment mix shouldn’t change too much over the course of a business cycle, the performance of the individual assets will.

Over time, some assets will perform well, and some will experience difficulties. This can throw off your selected risk parameters as asset... ...