Asset allocation is a strategy for investment selection. Simply put, it is the process of diversifying your investment dollars across different asset categories. It enables you to increase your return potential while reducing your risk of losing money.
How your investments are diversified depends on your willingness to accept a degree of risk. In general, the greater the risk, the greater the potential return. By diversifying a portfolio, you can pursue attractive performance potential while simultaneously spreading out your investment risk. Though this is generally perceived to be a smart approach, remember that asset allocation and diversification do not guarantee profits or ensure against a loss in a declining market.
You may select different investment strategies for your before-tax money and your Roth money. However, if you use the Nationwide ProAccount® managed account service, you will not have the ability to manage your before-tax and Roth dollars separately.
How important is asset allocation to your investment success?
Industry research has shown that approximately 90% of the volatility of a portfolio is determined by asset allocation. (Source: Brinson, Hood, Beebower Study, 1986.)
In short, while picking specific investments and deciding when to buy and sell those investments can have an impact on your overall return, a well-diversified portfolio may be the critical factor in determining how well your portfolio performs in the long run.
A personal asset allocation strategy is comprised of two key elements.
- Your time horizon — This weighting will vary depending upon the number of years your money can remain invested. A shorter horizon, for example, generally calls for a more conservative portfolio strategy.
- Your risk tolerance — This weighting measures your tolerance for market fluctuations. For example, an aggressive portfolio may not be suitable for a person with a low tolerance for risk, even if she or he has a long-term time horizon.