Staying Diversified Here are three of the most common ways to pursue investment results: market timing, security selection, and asset allocation.
Market Timing
Market timing is trying to predict what an investment, an asset class or, the market will do before it does it. Timing the market is a difficult strategy. Not only do you have to avoid investing during market downturns, but you also want to make sure that you're invested during the upswings. Often this means investing money when you are the least comfortable and taking money out when you feel the best about your performance. Because the market is highly unpredictable and emotions tend to lead us in the wrong direction, I often recommend against timing the market. Security Selection Many people believe that they know how to find the next "hot pick or hot dot" for investing, but predicting next year's best performer is anyone's guess. One year's top performer could be the next year's dud, and just because something did poorly the year before doesn't mean that it will do well the following year. Asset Allocation Asset allocation is a process of determining the right asset mix for you. As you develop your portfolio, remember that there isn't a cookie-cutter solution. Just because you're in your 50's doesn't mean that you should have x% in stocks and y% in bonds. You have your own goals, risk tolerance, and amount of money to use for those goals. What you need to do is to find the appropriate blend of investments to pursue your desired return within your level of risk and suited to your time frame. As you're looking at investments, try to research all available asset classes. Your allocation could include small, medium, or large U.S. companies; small, medium, or large international companies; emerging markets; bonds; or investment real estate. If your portfolio is large enough, then you may look to expand your allocation by investing in sectors of the market or utilizing other asset classes. Staying Diversified In his work on modern portfolio theory, Harry Markowitz found that only 1.8% of the average portfolio's return is attributed to market timing, 5.6% of investment return can be attributed to security selection, and that an appropriate asset allocation accounts for 91.5% of a typical portfolio's return. As you can see, the major tenets of this strategy include creating a diversified portfolio and investing in that portfolio for the long term. I typically suggest that clients rebalance their portfolio on an annual basis to make sure that one portion of their portfolio hasn't grown too large. By rebalancing, you're essentially taking the best performer and selling while it's high and moving that money to an area that is not performing as well and buying low. This article is for informational purposes only and is not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation. Asset Allocation does not ensure a profit or protect against a loss. | 
