|
|
|
|
|
|
|
|
|
|
 |
 |
 |
 |
 |
 |
|
The
main asset classes are stocks, fixed income products, and cash, with
the fixed income and cash providing the stability to a portfolio,
and the stocks (which may be held in mutual funds rather than individually)
providing the growth. Since asset classes do not generally move in
tandem with one another, diversification among asset classes is a
means toward achieving the appropriate risk-return balance for an
investor. See the Allocation
Profile section for proposed asset allocations by investor profile. Industry
allocation refers to the economic sectors represented in the equity
(stock and mutual fund) portion of a portfolio, which I have consolidated
into these six sectors:technology,
financial, health care, industrial, retail/consumer, and energy/utilities.
Allocation by industry sector is at least as important as which stocks
you own. See the Sector Allocation
section for proposed sector allocations for growth investors and breakdown
by industry sectors for the S&P 500 Index. Once
you have decided how much of your portfolio will be dedicated to growth,
the aggressiveness of that stock portion is determined by the allocation
among the industry sectors. Over
the long term technology has provided the most growth and the most
risk, as it is dependent on a healthy economy to do well; financial
companies and health care companies have provided the next most growth,
with less risk than tech stocks. These three sectors are over-weighted in an
aggressive portfolio. Industrial
companies, retail/consumer stocks, and the energy/utility sector would
be emphasized in a more conservative strategy, as they are typically
less volatile (therefore, less risky) than growth stocks; and they
do not provide as much growth. In
any case each of these sectors should be represented in a well-diversified
portfolio, since good periods in one sector may coincide with bad
times for other sectors, providing some balance. For example, if financial stocks are suffering from a period
of low interest rates and a draught in investment banking, oil stocks
may be thriving, because a shortage in oil is driving oil prices higher.
Diversification
reduces risk. |