What is asset allocation?

Asset allocation is the process of investing in different classes of assets to potentially achieve a desired return with a more controlled amount of risk. When you allocate your assets, you decide how much you should place in different types (classes) of investments based on financial objectives, time horizon and risk tolerance. This is also called creating an "investment mix."

What is an asset class?

An asset class is a group of securities that have similar features and behavior. The values of the securities in an asset class tend to rise and fall in similar cycles. Here are the asset classes used in this portfolio analysis:

Asset Class	Definition
Large Cap Stocks	Stocks of US companies with a market capitalization of $4 billion or more.
Small Cap Stocks	Stocks of U.S. companies with a market capitalization under $4 billion.
International Stocks	Publicly traded stocks of companies based in foreign countries.
Domestic Bonds	Government or corporate bonds issued in the United States.
Cash (Money Market)	Stable, short-term investments that provide income that rises and falls with short-term interest rates.
Other	Investments that cannot be classified in any of the above asset classes. Examples are foreign bonds, commodity futures and real estate.

Why consider asset classes?

Asset classes are used in the process of asset allocation to control the risk and return characteristics of a diversified portfolio.

In the long run, with a diversified portfolio, over 90 percent of your returns as an investor are determined by the class of assets you decide to hold, rather than stock picking or market timing. The remaining percentage of your return, less than 10 percent, depends on which specific stock, bond, or mutual fund you buy and when you buy it. A rule of thumb for long term investing is a 5-year time horizon.

What are the expected returns of these assets?

These are the sources of data that TeamVest uses when analyzing historical returns.

Large Cap Stocks:

What's the downside?

The downside is risk. Each type of investment carries with it some form of risk.

Stocks, as an asset class, have the highest potential return, but also the greatest volatility. This means that in any given period, stocks can fail to meet the target return and you can lose money. Stocks may be appropriate for a long-term investment strategy (a time horizon of at least 5 years is a rule of thumb).

On the other hand, money market funds, or keeping money in your mattress, will protect your principal, but the low rates of return expose your principal to the risk of inflation.

A diversified holding in any particular asset class approaches the market risk associated with the particular asset class, but the market risk can never be eliminated.

What else should I consider?

Maintaining an investment portfolio involves many activities. Selecting the asset classes in which to invest is just one. Here are some other things to consider, but is by no means a complete list. You may want to consult a professional advisor before making any investment choices.

Rebalancing

Different classes of investments will probably grow at different rates. Over time, your intended asset allocation may become out of balance, and you'll need to rebalance your investment holdings. Many investment experts recommend that you examine your asset allocation at least once a year to determine if you need to rebalance.

Changing goals

As your goals change throughout your life, you'll need to revisit your asset allocation to ensure is aligned with your financial goals.

Changing time horizon

As the time horizon for a financial objective changes, you'll need to adjust your asset allocation to reflect a more (or less) immediate need for your money.