WHAT IS ASSET ALLOCATION AND WHY DOES IT MATTER TO YOU AS AN INVESTOR? Asset allocation combines individual asset classes to build and manage a portfolio that reflects your personal goals, risk tolerance, and risk capacity. Step One: Stocks vs. Bonds – We begin by determining an appropriate balance between stocks and bonds. Bonds help you preserve your wealth, but they are unlikely to help you build a great deal more of it....

WHAT ARE RISK TOLERANCE AND RISK CAPACITY AND WHY DO THEY MATTER TO YOU AS AN INVESTOR? Risk capacity and risk tolerance may sound similar, but they are not the same things. What is Risk Tolerance? Risk tolerance is your ability, as an investor, to handle volatility and potential losses in your portfolio, or the degree of uncertainty you can handle. What is Risk Capacity? Risk capacity is the amount of risk you can take,...

WHAT is an Investment Policy Statement, or IPS? Your IPS is a written agreement, signed by you and your advisor when it is created, as well as whenever it is updated. It should include descriptions of the factors influencing your investment experience, such as: Designing your portfolio You & your financial situation – You and your family’s goals & timeframes. Are you adding to the portfolio, or taking distributions? Are your...

What is asset location and why does it matter to you as an investor? Let’s begin by noting that asset location should not be confused with asset allocation, which we addressed here. The two are related, but each makes its own contribution to your investment experience. Asset allocation (as described here) is about spreading your money among different asset classes, based on the amount of market risk and expected reward inherent to each. ...

What is rebalancing? Why and when should an investor do it? “Buy low, sell high.” The expression is so familiar that it’s become a cliché. And yet, few investors actually follow this most basic advice. Instead, they panic and sell (low) during market crises and chase already-hot stocks at premium (high) prices. Deliberate rebalancing is one of the best ways we know of to more consistently buy low and sell high while staying on track...

What other single action can you take to simultaneously dampen your exposure to a number of investment risks while potentially improving your overall expected returns?   What is diversification? In a general sense, it’s about spreading your risks around, widely and globally. In investing, that means it’s more than just ensuring you have a lot of holdings, it’s also about having many different kinds of holdings. If we compare this to the adage of...

WHAT ARE ASSET CLASSES AND WHY DO THEY MATTER TO YOU AS AN INVESTOR? Asset classes are categories (classes) by which we organize individual securities (assets) that share significant factors. There are broad asset classes for stocks (equities), bonds (fixed income), cash, and real estate. Within these broad classes, there are narrower asset classes focusing on the drivers of returns: For stocks, they may be based on: company size (small vs. large), relative price (value vs. growth), and profitability (high...