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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 the slideshow 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 Investor 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 of the Chief Investment Office at Merrill and Bank of America Private Bank, in the 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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Title 'Conservative Investor' Hed: What Kind of Investor Are You? Image: A pie chart on the right of the slide depicts a sample asset allocation for a conservative investor. Below the title is a box that has the word Conservative. To the left is a chart key highlighting three categories: stocks, bonds and cash. On the pie chart, bonds account for 58%, cash takes up 16%, and stocks represent 26%. The sub-header below the chart is Sample Asset Allocation.  Source: Chief Investment Office, January 2021. Below the source, the text continues: The strategic allocations shown here are designed as guidelines for a 25-year investment horizon for investors with low tax sensitivity.
Title 'Moderately Conservative Investor' Hed: What Kind of Investor Are You?  Image: A pie chart on the right of the slide depicts a sample asset allocation for a moderately conservative investor. Below the title is a box that has the word Moderately Conservative. To the left is a chart key highlighting three categories: stocks, bonds and cash. On the pie chart, bonds account for 55%, cash takes up 2%, and stocks represent 43%. The sub-header below the chart is Sample Asset Allocation. Source: Chief Investment Office, January 2021. Below the source, the text continues: The strategic allocations shown here are designed as guidelines for a 25-year investment horizon for investors with low tax sensitivity.
Title 'Moderate Investor' Hed: (Bold) What Kind of Investor Are You? Image: A pie chart on the right of the slide depicts a sample asset allocation for a moderate investor. Below the title is a box that has the word Moderate. To the left is a chart key highlighting three categories: stocks, bonds and cash. On the pie chart, bonds account for 39%, cash takes up 2%, and stocks represent 59%. The sub-header below the chart (bold) is Sample Asset Allocation. Source: Chief Investment Office, January 2021. Below the source, the text continues: The strategic allocations shown here are designed as guidelines for a 25-year investment horizon for investors with low tax sensitivity."
Title 'Moderately Aggressive Investor' Hed: (Bold) What Kind of Investor Are You? Image: A pie chart on the right of the slide depicts a sample asset allocation for a moderately aggressive investor. Below the title is a box that has the word Moderately Aggressive. To the left is a chart key highlighting three categories: stocks, bonds and cash. On the pie chart, bonds account for 24%, cash takes up 2%, and stocks represent 74%. The sub-header below the chart (bold) is Sample Asset Allocation.  Source: Chief Investment Office, January 2021. Below the source, the text continues: The strategic allocations shown here are designed as guidelines for a 25-year investment horizon for investors with low tax sensitivity."
Title 'Aggressive Investor' Hed: What Kind of Investor Are You? Image: A pie chart on the right of the slide depicts a sample asset allocation for an aggressive investor. Below the title is a box that has the word Aggressive. To the left is a chart key highlighting three categories: stocks, bonds and cash. On the pie chart, bonds account for 10%, cash takes up 2%, and stocks represent 88%. The sub-header below the chart (bold) is Sample Asset Allocation.  Source: Chief Investment Office, January 2021. Below the source, the text continues: The strategic allocations shown here are designed as guidelines for a 25-year investment horizon for investors with low tax sensitivity."

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