Your investment goals. Your financial advisor will need to understand your short- and long-term objectives - for example, a home purchase, college education, retirement, or business financing - to create an allocation that helps you meet your goals.
Your risk tolerance. Do you lose sleep when the markets slide? Or do you shrug off a market slide as the normal course of business on Wall Street? Your financial advisor can help you understand your emotional reactions to the risks of investing and can help you create a plan that suits your investment temperament.
Your comfort with risk versus return. The concept of risk/return suggests that low levels of investment risk will result in low returns, while high levels of risk will generate higher returns. Of course, there are no guarantees. While increased risk offers the possibility of higher returns, it can also lead to bigger losses. Balancing the risk you are willing to accept with the investment returns you need or want is something your financial advisor will discuss with you.
Determining the amount of investment risk you can tolerate is essential to establishing an asset allocation. Your financial advisor will examine your income, investable assets, investment goals - even your attitude about risk - to determine the risk/return trade-off that is right for you.
Your time horizon. In order for your financial advisor to tailor your portfolio to your goals, it is important to define your financial time frame. A portfolio invested to finance retirement in 20 years would include a different selection of securities than a portfolio intended to finance an imminent retirement. For example, a growth-oriented investor seeking to maximize hie or her long term return potential may be willing to tolerate the large short term fluctuations that can occur with a concentration of stocks. On the other hand, an investor with short term goals might be more likely to choose a bond-oriented allocation that is more suitable for generating income. Your financial advisor will work closely with you to establish an allocation to meet your particular needs.
Diversification. Your financial advisor will generally build your portfolio using a variety of asset classes to achieve a high level of diversification and long term stability.
But there is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss in a declining market.
Periodic re-balancing is essential. Your needs, goals, and time horizon change over time. So too, does the market. One of the ways your financial advisor adds value to your investment plan is by monitoring the periodically re-balancing the asset allocation of your portfolio.
Source: The Vanguard Group
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
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D2 Capital Management is a Member of the Southside Businessmen's Club and the Beaches Business Association
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