So Diversification Is the Answer

Asset allocation became a popular concept for investors during the 1990s – until one segment of the market – technology stocks – reached such high levels that it led many to question the value of owning a diversified portfolio.

But that world turned upside down in 2000 and has continued on a similar path for much of 2001. As a result, more and more individuals have rediscovered that owning a mix of different types of investments may actually be the best way to go.

The goal – a smoother ride
As most of us have learned over the past year or more, the markets can sometimes send us on a bumpy ride. Those who put too much of their money to work in high-flying growth stocks found themselves in for a rude awakening.

On the other hand, investors who took a longer-term approach, and focused on building portfolio value by owning a balanced mix of investments, were able to weather the storm a bit more effectively. This demonstrates one of the most important goals of an asset allocation approach – to build wealth while minimizing the short-term fluctuations that are a normal part of the investment process.

Recent history makes a solid case for diversification
The extreme volatility of the past few years demonstrates the value of taking a diversified approach to investing.

From 1995 through 1999, large-company stocks, as measured by the Standard & Poor's 500 Index, a group of unmanaged stocks, rose by 20% or more every year (no fees or taxes are assumed in the performance of the Index). Other parts of the market were less attractive in that time.

In 2000, the situation changed dramatically. Large-company stocks finished in negative territory, but other types of assets performed better. Most notably, positive returns in bonds and cash investments would have helped offset some of the downside impact of the stock slide.

Clearly, a portfolio that included a mix of different types of stocks and bonds performed better in 2000.

Over the past decade, stocks have been more volatile than this mix of investments, based on different indices representing the asset classes in the portfolio.

Range of returns 1991 through 2000
Investment Choice	Best Year of Performance	Worst Year of Performance
Large-Cap Stocks only	37.6%	-9.1%
Balanced Portfolio	25.6%	-1.4%

A concept for the times
As more and more of us have faced "statement shock" this year, seeing, perhaps for the first time, negative results in a portfolio that may have been too aggressive, it is clear that asset allocation makes sense.

So how can you determine the right mix for your needs? It starts by carefully assessing your goals, the amount of time you can let your money work for you and the amount of risk you are comfortable in taking.

In today's volatile markets, you may find that such a balanced approach to investing is more important than ever.

Content is for informational purposes only and may not accurately reflect your specific situation. Information is not intended to provide financial, legal, tax, or accounting advice. You should consult a qualified advisor for advice specific to your own circumstances.