How to Protect your Nest Egg from Market Swings
June 20, 1999. An asset allocation of your portfolio is the best way to go in any type of market,
including today’s high volatile bull market. Why diversify when the market is in a buying frenzy? Because you never
know when the bull will stop running. The rule of thumb is not to put all your eggs in one basket.
Asset allocation works because the various asset classes do not move in lock step. When one is
declining, at least one of the others will usually be rising. The right combination can reduce overall volatility
and risk by flattening the peaks and troughs. Stocks, bonds and other classes historically outperform cash. A good
asset allocation portfolio will outperform one that uses cash alone to reduce risk.
The reason that most advisers recommend asset allocation is that years ago many of them had lost
considerable amounts of money for their clients. So now they are more conservative.
The lesson to draw is that it is easier to beat the stock market when you expand your focus beyond
equities to include several asset classes. By expanding your allocation, focus beyond stocks and cash. You will
improve returns without incurring any more risk.
What is the right asset allocation? It all depends on the number of years you have before you
retire and your tolerance for risk. I would be very comfortable with a portfolio of 70% stocks or stock funds;
20% bonds; 10% cash. If you are retired, then the correct mix would be: 40% stocks; 40% bonds and 20% cash. Of
course like I said before it all depends on your tolerance for risk. The more equity you have the more risk is
involved.
If you seek a financial adviser to help get the best advice for you, make it a policy to interview
several to see which one is most comfortable for YOUR needs.
George
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