You Don't Have to Be a Stock Market Expert to Benefit from This
Selecting asset categories rather than individual securities is the key to asset allocation. This investment strategy can help you to effectively target your objectives and reduce risk. It could be a cornerstone upon which you build your financial future.
How do you know which stocks will make money and which will lose money? What about bonds? A common misconception is that you have to be a financial expert to pick the right investments and achieve financial success. Fortunately, there is an investment strategy for people who don't have a Ph.D. in finance. With asset allocation, you simply choose a combination of asset categories and leave the investment specifics to the experts.
How Does Asset Allocation Work?
Asset allocation, a time-tested approach to portfolio management, builds on the basic principle of diversification "don't put all your eggs in one basket." You create a customized portfolio from several asset classes that reflects your objectives, resources, and risk tolerance. For example, a conservative investor might choose a portfolio that consists of 50% government bonds, 30% Treasury Bills, and 20% large-company stocks. A balanced portfolio might be made up of 50% government bonds and 50% large-company stocks. An aggressive investor could opt for a portfolio containing 50% small-company stocks, 30% large-company stocks, and 20% government bonds. The charts below illustrate how these three portfolios would have performed from 1977 through 1996.
By dividing your portfolio among a variety of investment classes, you minimize your reliance on the performance of any one class. Some assets may experience growth while others decline. Because changing economic and financial conditions affect various types of assets differently, each asset category's return partially offsets those of others. Although past performance does not guarantee future results, in the long term, these offsetting movements may reduce the overall risk of your portfolio and enhance returns.
Government Bonds and Treasury Bills are based on the One Bond Portfolio index, Large Company stocks are based on the S&P 500 index an unmanaged index generally considered representative of the U.S. Stock Market, and the Small Company Stock returns are based on the NYSE Fifth Quintile and the Dimensional Fund Advisors (DFA) Small Company Fund.
For illustrative purposes only. The investment returns shown do not represent the past or future performance of any particular portfolio. Past performance is no guarantee of future results.
The Key Determinant of Portfolio Performance
Through asset allocation, you can spread your money across several asset classes, which over the long term can reduce risk and potentially enhance return. Since you don't rely on picking individual securities, you don't have to be an investment guru or be able to pick the next "rising star" of the market to succeed. Research shows that 91% of a typical portfolio's return can be attributed to the selection of broad asset classes, rather than individual securities. Specific security selection, market timing, and other factors account for just 9% of portfolio performance. ("Overview Asset Allocation in a Changing World," Financial Analysts Journal, December 1998.)
Putting Asset Allocation to Work for You
Vehicles such as mutual funds, variable annuities, and variable universal life insurance products may offer the potential for strong investment performance, investment flexibility, and convenience. The asset allocation feature of these financial products can offer individuals the opportunity to automatically allocate their investments among several asset categories to tailor a portfolio that best suits their needs.
Buying shares in a mutual fund gives you partial ownership of a professionally managed investment portfolio. This "basket" of assets offers built-in diversification and allows you to leave the day-to-day fund management to the professionals. You can choose to allocate your investments among a variety of investment options which offer the asset mix that suits your investment objectives.
An annuity is a contract between you and an insurance company in which you pay a premium, and the insurer agrees to pay you a future income stream. With a variable annuity, you have control over how the premiums are invested. You choose how to allocate your premiums from a variety of investment divisions. Variable annuities can provide diversification, investment flexibility, professional investment management, and convenience. Moreover, annuities offer tax-deferred accumulation and a guaranteed life insurance benefit backed by the assets of the insurer.
Variable Universal Life (VUL)
Variable Universal Life (VUL) combines the financial protection of permanent life insurance with the flexibility of a variety of investment options. Like traditional whole life, VUL can offer a tax-free, probate-free life insurance benefit, as well as tax-deferred cash value accumulation. In addition, with VUL you control how your cash value is invested through a variety of investment divisions.
Survivorship Variable Universal Life (SVUL)
Survivorship Variable Universal Life (SVUL) covers two individuals in one life insurance policy and pays a life insurance benefit after the death of the last surviving insured. SVUL may serve as a key estate conservation tool by providing beneficiaries with the liquid assets they may need to help pay estate taxes after both insureds die. In addition, SVUL offers flexibility and a variety of investment options similar to those available with VUL.
Taking the First Steps
Evaluating your current financial situation and setting goals to meet future needs are the first steps in sound planning. Your goals and needs are specific to you, and investment choices will depend on your situation. Factors such as age and income, as well as intermediate and long-range goals, should be considered when making your investment plans. For instance, do you need to generate current income? Prepare for a child's education or build wealth for retirement? Another consideration is your level of comfort with the ups and downs associated with different asset types. When it comes to financial risk taking, are you conservative, moderate, or aggressive? The answers to these questions will help determine the allocation strategy that's right for you. For ideas on asset allocation and financial products and services, contact New York Life today to set up an appointment with a NYLIFE Securities Registered Representative.
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