Whether your retirement is years away or right around the corner, your investment portfolio should be designed with your financial goals in mind. It needs to be forward-thinking enough to handle the whims of the market but flexible enough to make changes on the fly.
One of the most important concepts for any investor to understand is asset allocation. Put simply, asset allocation describes the proportion of stocks, bonds, and cash that make up your investment portfolio. Although this concept is straightforward, it has one of the largest impacts on your financial future.
Each asset class has its own set of risks and rewards, depending on your time horizon and financial goals. You and your financial advisor may make adjustments to your portfolio over the years as your needs change.
- Stocks, also called equities, allow you to own a share of a publicly traded company. By investing in stocks, you have the potential for a higher return on your investment. But if the company has a bad year, or if the economy takes an unexpected turn, you may also lose money.1
- Bonds, overall, have been a steadier source of fixed income. However, bonds are subject to interest rates and inflation risks, and their rate of return tends to be lower.1
- Mutual funds and ETFs (exchange-traded funds) are pools of multiple companies in which you can invest. While many mutual funds have a mix of stocks and bonds, some specialize in one or the other. Mutual funds offer less risk than investing directly in stocks, as diversifying your asset allocation tends to spread the risk.1
- Cash and cash equivalents give you flexibility for any unexpected emergencies that may arise. If your hot water heater dies, having funds on hand to take care of it without resorting to a credit card is helpful. However, your cash-on-hand cannot earn you money the way other investments might.1
Finding A Balance
When it comes to managing your portfolio, asset allocation requires a more hands-on approach. While "Set It and Forget It” may be the easiest route, changes in your situation may warrant a portfolio review to make sure your asset allocation still makes sense. If it's been a while since you've discussed your portfolio with a professional, give us a call to set up a time to review your goals and make sure your asset allocation makes sense for you.
At the present moment, there is a large grocery store being built down the street from my house. It is exciting watching it go from the initial ground breaking stage to pouring the foundation and setting all of the structural members in place. No doubt all of the engineers and contractors are meticulously making sure all of the details of each individual stage are carried out correctly to make sure all of the building "blocks" are in their proper respective places.
This same truth of "building blocks" also applies to our financial and spiritual lives as well. While asset allocation is the act of putting the correct building blocks in place when constructing an investment portfolio, building our spiritual lives on the proper foundation is key to a sound spiritual base. Matthew 7:24-25(TLV) says “Therefore everyone who hears these words of Mine and does them will be like a wise man who built his house on the rock. And the rain fell, and the floods came, and the winds blew and beat against that house; and yet it did not fall, for its foundation had been built on the rock." If we are diligent to make sure our spiritual lives are constructed on the proper foundation of God's Word, we will not be moved when the storms come.
Evergreen Financial Group is a Fee-Only Financial Planning and Investment Firm located in Billings, MT serving clients in Montana, Wyoming and virtually across the country. Evergreen Financial Group specializes in working with Christian families, including Young Professionals, Current and Future Retirees and Church Staff Members.
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