Asset allocation is simply allocating your assets to a variety
of investments to protect against volatility or market
downturns. An example would be to allocate money to large
cap stocks, small cap stocks, a growth mutual fund, and
an international fund. Different types of investments increase
or decrease in price at different times. Some investments
are highly volatile (experience large price swings during
the year), while others are much less volatile, (experience
smaller price swings during the year). Possessing a variety
of investments will help to protect you against market
downturns and volatile investments, (if you choose to place
volatile investments in your portfolio).
How does this protection occur? A variety of investments
will help to balance the value of your portfolio. As some
investments occasionally go down or remain constant, others
may go up. This up and down act will help to balance the
value of your overall portfolio. Understanding market downturns
and volatility will enable you to hold your investments long-term.
Throughly research your investments so you can choose them
wisely, this will also enable you to sleep well at night,
at least when it comes to your investments (see portfolio
mix calculator).
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