To protect their ability to earn and accumulate wealth, many people choose to hold insurance, as well as maintain an emergency fund, to help guard against depleting savings that are intended for other goals.
Asset allocation is used to distribute your investable assets among a variety of investment categories. This process aims to:
- Reduce overall investment risk
- Create more reliable investment forecasts and
- Improve the risk/return tradeoff of your portfolio
Accumulation planning also involves the choice of securities for your investment portfolio. Basic securities are stocks, bonds, and mutual funds. Separately managed accounts, indices, option strategies, short-term assets, and annuities also may be used to optimize your portfolio.
Alternative investments may also be an option for the right investor. One of the premier features of alternative investments is diversification, resulting from the inclusion of investments that have reacted differently to the markets than more traditional investments. Managed futures, commodities, hedge funds, oil and gas, tax shelters, venture capital funds, and real estate are all examples of alternative investments.
Some situations require different expertise than typical stock and bond portfolio implementation. These situations usually pertain to employer-related retirement plans and stock options, margin strategies, and real estate exchanges.
Most investors understand that as risk increases, the potential for return also increases. But there is a point for every individual where the level of risk is not worth the potential return. The goal of asset allocation is to provide you with the risk/return scenario that is most comfortable for you.
Investors should note that diversification does not assure against market loss and that there is no guarantee that a diversified portfolio will outperform a nondiversified portfolio.
Alternative investments may be illiquid in nature, redeemed at more or less than the original amount invested, subject to special risks, and not suitable for all investors.