Guest post by Soltis Investment Advisors
In recent years of dramatic market swings, the need for managing risk has become more apparent than ever to investors. Many of the world’s most prominent investors have long advocated that appropriately handling risk is the most important part of the investment equation.
We’ve probably all heard the saying “you win by not losing” somewhere along our investing journey. In short and simple terms, risk as measured by investments is simply price volatility of those securities. A security that fluctuates dramatically with the market is considered risky and one that maintains stability is conservative.
If risk is so important to your investing success, how do you actually manage it?
The most significant tool at your disposal is asset allocation. Asset allocation is the discipline of spreading investments among multiple asset classes such as stocks, bonds and cash. These may include large-cap stocks, small-cap stocks, commodities, international stocks, real estate and hard assets. This approach is a time-tested process that helps minimize the risk of your overall investments. In simpler terms, asset allocation provides a “smoothing out” effect to the inherent bumpy ride of the financial markets.
To effectively asset allocate, there are three components that should be addressed as an investor builds his/her portfolio:
Multiple Asset Classes – Investors at a minimum should use stocks, bonds and cash to minimize the overall risk of their investments. Electing how much to go into each will determine how aggressive/conservative you would like to be.
Multiple Styles – In each asset class, a portfolio should have more than one style of market exposure. If you choose to allocate to stocks, for example, you should have that money divided among large-cap stocks, mid-cap stocks, small-cap stocks and international stocks.
Multiple Managers – This component of diversification encourages investors to use products beyond just one provider. When we allocate, we want to ensure we have the very best solution at each position of the portfolio.
Determining the optimal mix of your investments is anything but an exact science. No two investors are identical and their investments should reflect those differences. That is why asset allocation becomes so important. It enables each investor to identify the individual needs and tailor their investments to best meet their goals and objectives.
Soltis Investment Advisors (Soltis) is a registered investment advisory firm located in St. George, Utah. Soltis delivers financial security and personal freedom to individual and institutional investors through a unique and proprietary process of investment analysis.
This article should not be construed as investment advice from Bank of American Fork. Please seek investment advice from a qualified, licensed investment advisor. This article does not constitute an endorsement by Bank of American Fork of Soltis or any other third party.
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