April 30, 2015

Investments: An Asset Allocation Primer

Put simply, asset allocation is choosing where to invest your money. The choices are seemingly infinite, which can mystify even the savviest investor. But it’s not magic or voodoo. Take a simplified approach and the basics reveal themselves.

Know the main asset classes
Stocks. You purchase a part of an individual company. Stocks are well known for fluctuating frequently in value, and carry a higher level of market risk. But stocks historically earn higher returns than other asset classes over time. Higher risk = higher reward.

Bonds. You are basically providing an IOU to a government, municipality, corporation, federal agency or other entity. In return for your money, you are issued a bond that provides a specified rate of interest over time. Lower risk = lower reward.

Cash equivalents. These assets are defined as being short-term, low-risk, low-return and highly liquid. They include U.S. government Treasury bills, savings accounts and CDs.

Put simply, diversification is placing your eggs in several different baskets. When you diversify, you help reduce “single-security risk,” or the risk that your investment will fluctuate widely in value with the price of one holding. The hope is that should one investment fall, another in your portfolio may rise. Of course, there are no guarantees, but diversification reduces your overall exposure to risk.

A Simple Process, With Dramatic Potential 
Review your portfolio on at least an annual basis, making adjustments as your goals and other circumstances warrant. A well-crafted plan of action can help you weather all sorts of changing market conditions over the long term as you aim to meet your investment goals.

How to get there
Lake Michigan Investment Services provides independent advice and guidance to see you through the maze of today’s investment options and opportunities. Contact LMIS by going online to lmcu.org/investments, or call (616) 234-6524 for a free, no obligation financial review of your portfolio.