Dale Ishida Suezaki is a financial adviser with Morgan Stanley Smith Barney, 329-7979.
Your investment goals are unique to you. An important step toward achieving your goals is to include the appropriate mix of assets in your portfolio. This mix, known as asset allocation, is the balance of equities (stock), bonds (fixed income) and cash (or cash alternatives) within your portfolio. A core objective of asset allocation is to potentially increase the overall return for a given degree of risk or to reduce the overall risk of a portfolio for a targeted level of return. Before deciding on your allocation, you should consider your investment goals and your level of risk tolerance.
Are you looking to generate a predictable stream of income to meet living expenses? Or do you want to generate capital growth? Are you investing for retirement? If so, what is your retirement timeframe? You should clearly define your investment goals and horizon.
A key to setting investment goals is to balance return expectations with your willingness to accept risk. It is important that you are comfortable with the amount of risk in your portfolio so that you will be able to stick with your investment strategy even through turbulent times.
You should strive to establish realistic expectations and carefully determine the appropriate investment time-frame for an investment plan. You may have multiple goals impacting your investment strategy and, accordingly, may have multiple time horizons. Typical goals include payment of college tuition for your children, purchase of a home and retirement, among many others.
Your investment goals, time horizon and risk tolerance will evolve over time — your asset allocation should change with them. At the beginning of your career, you may be willing to take on more risk, as you have time on your side to recoup losses. You and your financial adviser may determine that it is appropriate to include a relatively high allocation to equities at this stage, as well as fixed income instruments, which focus on capturing high yields.
As you accumulate wealth, your needs may expand to include the purchase of property, the cost of education and impending retirement. You and your financial adviser may determine that you should reduce your exposure to riskier investments and increase your allocation to more highly rated investments, such as investment grade corporate bonds, mortgage backed securities and, if appropriate, tax-exempt municipal bonds.
Near the end of your career, you may have a much lower tolerance for risk as you look toward retirement and spending some of the wealth you have accumulated. Your focus may shift to income generation and principal protection at this stage.
Equally important is regular rebalancing of your portfolio to maintain your target allocation. As markets change and different assets appreciate and depreciate differently, the relative weightings of each sector, geographic region and asset class in your portfolio will change. In order to keep your asset allocation in line with your long-term strategy, it is important to revisit and rebalance your portfolio regularly.
Dale Ishida Suezaki is a financial adviser with Morgan Stanley Smith Barney, 329-7979.