Asset Allocation INTRO: One of the key buzzwords for financial planning today is asset allocation. Certified Financial Planner, Bruce Hagan is here today to give us a common sense explanation of the term and explain what you should know about asset allocation. Q1: When did this term enter the public vocabulary so to speak and what does it mean? A1: Well, The term has been in existence for a very long time but it really began to surface extensively in the press only in the last ten years. Asset Allocation simply refers to the method of diversifying within an investment portfolio the different categories and classes of assets to properly provide the sought balance of risk and return. An even simpler way of saying that is taking the pie and cutting it into different size slices. Q2: You referred to different categories. What do you mean by that? A2: The major categories of investments in a portfolio would be cash, bonds, and equities (stocks). After you’ve decided what your investment goal is and what your level of risk tolerance is, you must then decide how you’ll divide your available monies among these broad categories. Q3: O.K. and then you mentioned asset classes. A3: Yes, once you decide you want, for example, 50% in stocks and 35% in bonds and 15% in cash, you would then look at the 59% in stocks and further break that down into asset classes, such as small cap stocks, large cap stocks, value stocks, international stocks and just further diversify. Q4: Then do you choose the individual stocks or mutual funds that fit those classes? A4: Exactly! This is the final piece of the puzzle. The problem is most people don’t take the time and effort to construct the pie chart and instead purchase stocks and funds on their own merit without regard to how they may fit into the overall balancing of the portfolio. Over time, they may wind up with a portfolio that has a lot of different stocks or funds in it, but it’s really not well diversified. Q5: It sounds like the asset allocation process is pretty important. A5: Indeed. Several studies have shown that over time the asset allocation decisions can be more important to the achieved returns than the decision of which specific stocks, bonds or funds to purchase. Q6: Quickly recap the process for us. A6: 1. Define goals and risk tolerance. 2. Divide money between bonds, equities, and cash. 3. Divide each category into classes: Bonds might include, govts, corporates, munis foreign bonds. 4. Fill in the classes with specific investments. And 5. This is a model that you can change periodically as you experience changes in your life. The discussion offered above and in the movie should not be considered an endorsement by Florida State University. They are offered in the educational sense of providing thought-provoking information for our Web audience. Copyright shared with Florida News Channel (FNC), all rights reserved. Broadcast 2/4/00