Your Guide to Asset Allocation

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Asset allocation can be a helpful tool to balance your risks and your rewards. In order to develop a strong asset allocation strategy, investors divide their portfolios among different assets that might include equities, fixed-income assets, and cash and its equivalents. Investors ordinarily aim to balance risks and rewards based on financial goals, risk tolerance, and the investment horizon. Why does your asset allocation matter? Keep reading to find out more information and follow along with our BECU Investment Services Asset Allocation Worksheet (PDF).

Variability and What It Could Mean for You

Simply put, asset allocation is a way to keep us from putting all of our eggs in one basket so we can do a better job of balancing potential risks while pursuing potential returns.

Of course, there's no “one-size-fits-all” way to divide a portfolio between asset classes to achieve an investor's objectives because goals, timelines, resources, and circumstances vary. And, while there are no guarantees for increasing returns or reducing risks, there are strategies with the potential to help you do both.

Asset allocation determines about 90% of the variability in a portfolio's long-term returns.¹

Major Asset Classes – Stocks, Bonds, and Cash Equivalents

There are a lot of investment options out there: stocks and stock mutual funds, corporate and municipal bonds, bond mutual funds, lifecycle funds, exchange-traded funds (ETFs), money market funds, and U.S. Treasury securities.

These options boil down to three basic categories: stocks, bonds, and cash or cash equivalents. These three asset classes come with different levels of risks and returns and react differently in various circumstances and time frames.

Stock investing involves risk, including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

Measuring Potential Risks and Returns

Investors who aren't sure how — or how much — they want to invest in different asset categories may want to explore the options mutual funds present. Mutual funds make it easier for investors to diversify because they pool money from many investors to invest in stocks, bonds, and other financial instruments. The ultimate investing decisions are made by professional fund managers.

Mutual fund investments enable you to own a small portion of many different investments, helping you to balance your potential risks and rewards. Losses on some securities can potentially be offset by gains made by others.

You need to know, however, that not all mutual fund investments provide automatic diversification because some focus on particular industry sectors. Choosing a mutual fund still requires attention to detail and/or research to determine if it's right for you.

These different asset categories are considered to be the tools for an investment strategy. There are many ways to combine them to help you achieve your goals.

What's Your Current Allocation?

Use the BECU Investment Services Asset Allocation Worksheet (PDF) to help you review your retirement plans, investment accounts, bank accounts, and other assets to determine your asset allocation for each category.

Please follow the instructions on the front side of the worksheet, which is designed to give you an overview of your current allocation. You'll jot down your assets, such as retirement plans, investment accounts, and bank accounts. Please note where most of these assets are invested — whether it's mutual funds, stocks, bonds, cash equivalents, or other investments.

Next Steps:

• Start/confirm your goals.
• Recognize your risk tolerance.
• Set a timeline for your goals.
• Establish an emergency fund/major purchases preparing for the unexpected.
• Accumulate funds for longer-term goals.
• Preserve your wealth.
• Manage your risk.

When Is It Time To Reevaluate Your Allocation?

Allocating your assets is not a one-time decision. You need to recognize that you may need to make adjustments based on what's going on in your life.

Maybe your job has changed, you're getting married, divorced, or you've had children. These are just a few examples of the kinds of changes that could signal it's time to review your financial goals — and your allocations.

It's recommended that you review your asset allocations at least once a year — even if there haven't been any big changes in your life. You might discover that market performance has shifted your allocations without you even realizing it.

You might also need to consider allocation changes as your timeline shortens for certain goals, such as when your kids start college or when you reach retirement age.

Talk to a Financial Advisor

Financial advisors at BECU Investment Services are here to help. Our team will take the time to get to know you, understand your goals and plan and implement a financial and asset allocation strategy that's appropriate for you. Set up a complimentary consultation or call 206-439-5720 today.