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Market Decode: Balancing Risk and Reward with Asset Allocation

Senior investment strategist Marci McGregor explains how asset allocation can help you find the right mix of stocks, bonds and cash to match your risk tolerance—especially when the markets get volatile

DESPITE ITS (OFTEN) FORGETTABLE NAME, asset allocation is an essential concept to remember, because it directly ties the composition of your portfolio—that is, the amount of stocks, bonds and cash you hold—to your financial goals and aspirations. It also helps you factor in your investing time horizon, comfort with risk and liquidity needs, or funds for unexpected expenses.

A great way to illustrate how asset allocation works is the classic pie chart (see our graphic below). This shows the relationship between how much market risk you’re comfortable with and the percentage of stocks, bonds and cash you could consider holding. A general rule of thumb: The more risk-averse you are, the more you’ll want to be invested in “safer” assets, like high-quality bonds and cash. On the other hand, if you’re more comfortable with risk—and you have a longer time horizon to invest—you could consider holding a greater percentage of stocks. They’re more prone to short-term price swings but offer potential for greater long-term growth. Our easy-to-use Identifying Your Allocation Profile questionnaire can help you determine what type of investor you are.

Keep in mind, asset allocation is not a one-time “set-it-and-forget-it” process. “Changes in the markets can cause your allocation to drift over time,” points out Marci McGregor, senior investment strategist, Chief Investment Office, Merrill and Bank of America Private Bank, in our video above. So you might consider rebalancing your portfolio on a regular basis to ensure that it reflects your current preferences for stocks, bonds and cash.

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Alt text: Hed: (Bold) What Kind of Investor Are You? Dek: Conservative is in a box below the title of the slide. Image: A pie chart on the right of the slide depicts what a more conservative investor could look like based on asset allocation. At the top, the title reads: (Bold) What Kind of Investor Are You? Below the title is a box that has the word Conservative. To the left of the chart is a scale highlighting three categories: stocks, bonds and cash. On the pie chart, bonds account for 52%, cash takes up 28%, and stocks represent 20%. The sub-header below the chart (bold) is Sample Asset Allocation.  Source: Chief Investment Office, January 2019. Below the source, the text continues: The strategic allocations shown here are designed as guidelines for a 25 year investment horizon for investors for the highest level of liquidity needs.
Alt text: Hed: (Bold) What Kind of Investor Are You? Dek: Moderately Conservative is in a box below the title of the slide. Image: A pie chart on the right of the slide depicts what a more conservative investor could look like based on asset allocation. At the top, the title reads: (Bold) What Kind of Investor Are You? Below the title is a box that has the word Moderately Conservative. To the left of the chart is a scale highlighting three categories: stocks, bonds and cash. On the pie chart, bonds account for 61%, cash takes up 2%, and stocks represent 37%. The sub-header below the chart (bold) is Sample Asset Allocation.  Source: Chief Investment Office, January 2019. Below the source, the text continues: The strategic allocations shown here are designed as guidelines for a 25 year investment horizon for investors for the highest level of liquidity needs.
Alt text: Hed: (Bold) What Kind of Investor Are You? Dek: Moderate is in a box below the title of the slide. Image: A pie chart on the right of the slide depicts what a more conservative investor could look like based on asset allocation. At the top, the title reads: (Bold) What Kind of Investor Are You? Below the title is a box that has the word Moderate. To the left of the chart is a scale highlighting three categories: stocks, bonds and cash. On the pie chart, bonds account for43%, cash takes up 2%, and stocks represent 55%. The sub-header below the chart (bold) is Sample Asset Allocation.  Source: Chief Investment Office, January 2019. Below the source, the text continues: The strategic allocations shown here are designed as guidelines for a 25 year investment horizon for investors for the highest level of liquidity needs.
Alt text: Hed: (Bold) What Kind of Investor Are You? Dek: Moderately Aggressive is in a box below the title of the slide. Image: A pie chart on the right of the slide depicts what a more conservative investor could look like based on asset allocation. At the top, the title reads: (Bold) What Kind of Investor Are You? Below the title is a box that has the word Moderately Aggressive. To the left of the chart is a scale highlighting three categories: stocks, bonds and cash. On the pie chart, bonds account for 26%, cash takes up 2%, and stocks represent 72%. The sub-header below the chart (bold) is Sample Asset Allocation.  Source: Chief Investment Office, January 2019. Below the source, the text continues: The strategic allocations shown here are designed as guidelines for a 25 year investment horizon for investors for the highest level of liquidity needs.
Alt text: Hed: (Bold) What Kind of Investor Are You? Dek: Aggressive is in a box below the title of the slide. Image: A pie chart on the right of the slide depicts what a more conservative investor could look like based on asset allocation. At the top, the title reads: (Bold) What Kind of Investor Are You? Below the title is a box that has the word Aggressive. To the left of the chart is a scale highlighting three categories: stocks, bonds and cash. On the pie chart, bonds account for 11%, cash takes up 2%, and stocks represent 87%. The sub-header below the chart (bold) is Sample Asset Allocation.  Source: Chief Investment Office, January 2019. Below the source, the text continues: The strategic allocations shown here are designed as guidelines for a 25 year investment horizon for investors for the highest level of liquidity needs.

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