Lately, there has been a certain level of volatility in the financial markets, with concern about rising interest rates and high stock prices continuing to affect the averages. Asset classes often respond differently to changing economic and political conditions. Historically, stocks have at times returned higher percentages than bonds, while in other instances bonds have been the stronger performers. It may be tempting to simply invest in whatever asset is performing well at the time. However, this approach does not take into account the sometimes-surprising swings in market behavior that can quickly erase gains made by an undiversified portfolio.
Asset allocation can help provide the best protection against the whims of a fickle market.
By diversifying your investments, you create a well-balanced portfolio. Asset allocation, by spreading risk, helps financial advisers create a portfolio that best suits your tolerance for risk - and maintains that balance as your goals and life stages change. Diversification also allows you to take advantage of imbalances among markets. For example, the differences between the stock and bond markets and between domestic and foreign markets could create investment opportunities. Stocks are based on the Wilshire 5000 Index.