Signs of fall are apparent. A chill is in the air, leaves are beginning to show vibrant colors, and squirrels are scurrying to store nuts in anticipation of the cold winter ahead.
The fall extends to financial markets around the world, which plummeted even after the president signed Congress’ economic bailout plan into law. If you’re tentative about your financial future, rest assured. We could all take a lesson from those busy squirrels.
We need to start saving for our future but with all the options available where do we start? Creating an integrated strategy is critical to planning your financial future. Perhaps you have an employer-sponsored plan, an Individual Retirement Account (IRA), and a brokerage account all with investments intended for retirement. Unless you have a cohesive plan that incorporates all these investments you run the risk of either duplicating holdings or not owning certain asset classes at all. Diversification and asset allocation both play important, but different, roles in a portfolio. It is possible to be highly diversified among investment choices but not be properly allocated among various asset classes. To illustrate this concept let’s say you own five different investments in your account but if each has the same objective, long-term capital appreciation for example, then you simply have five funds investing in the same asset class. Unless you are investing across asset classes, and not simply within an asset class, you may not have the correct asset allocation to achieve your goals. Note, no investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values.
There is no asset allocation model that is right for everybody since asset allocation strategies should be based on time frame, goal and personal risk tolerance. Reviewing and rebalancing your accounts at least annually will allow you to make the necessary changes to help you reach the goal. Keep in mind, however, that the proper way to rebalance is with a plan where you sell investments that have exceeded your specified allocation and buy into investments that may have underperformed and thus are below your intended allocation.
For example, let’s assume that you start with 20 percent invested in asset class A and 35 percent invested in asset class B. During your annual review of your portfolio you note that asset class A has appreciated and thus represents 30 percent of the portfolio and asset class B has underperformed and now represents just 25 percent of your account. Although it may feel counter intuitive to buy into an asset class that is declining it’s actually the correct way to rebalance. You want to buy low and sell high but do so with a structured plan to maintain the proper asset allocation to meet your planning objectives.
Remember, by squirreling away today you can begin to plan for your retirement tomorrow. Saving even small amounts and using a cohesive plan can start you on the path to financial independence.
Securities and Investment Advisory Services offered through American General Securities Incorporated (AGSI) Member FINRA/ SIPC, Member American International Group, Inc. GFG, LLC is a separate entity from any member of AIG. AGSI does not offer tax or legal advice.
Carol E. Arnott, Registered Representative, Investment Advisor Representative