Fixed-income investments can be important means for the preservation of principal, generation of income and stabilization of overall investment returns. As such, investors should decide the appropriate allocation between fixed income and equities (stocks) to meet their goals. (Fixed-income investments generally include U.S. Treasuries, U.S. Agencies, brokered certificates of deposit, municipal bonds, corporate bonds or money market securities.)
The task of allocating investment funds among different asset classes can seem daunting given the myriad of securities from which to choose. Because of the dips and swings in market performance within various investment classes, it is important to maintain a diversified portfolio that is appropriately tailored to match each investor’s particular needs and situation. As a result, asset allocation decisions between equity and fixed-income investments primarily are driven by both an investor’s time horizon and risk tolerance.
Long-term investors should evaluate their time horizon and risk tolerance by adjusting portfolio composition as the years go by and as life-changing events occur. For example, early-career investors may classify themselves as aggressive investors with an 80 percent to 100 percent allocation to stocks. Mid-career investors in a more traditional investment position may better match their risk characteristics with a 60 percent to 70 percent allocation to stocks. As preservation of principal and income generation become more important, investors focus more on safety and less on growth by constructing a portfolio containing 40 percent to 50 percent in stocks. Finally, even the most conservative of investors would likely still benefit from at least a 20 percent allocation to stocks.
Making timely and consistent asset allocation adjustments between stocks and fixed-income investments can shield an investor’s portfolio from the market’s worst gyrations. Diversification through asset allocation does not promise to eliminate the possibility of investment losses, however. Asset allocation can help minimize those losses and position an investor to participate in market gains, thus allowing entrance into retirement with potentially greater financial confidence.
FDIC-insured certificates of deposit, U.S. Treasury and Agency Securities, municipal bonds, corporate bonds, and other fixed-income investments may be purchased through Zions Direct at 1-800-524-8875.
Featured in the September/October 2010 issue of Zions Bank’s Community magazine.
Larry Denham, senior vice president and business development officer for Zions Direct.
Please note: The preceding article is offered for informational purposes only. Investment products and services are available through Zions Direct, member of FINRA/SIPC, a nonbank subsidiary of Zions Bank. Investment products are not FDIC insured, are not guaranteed by Zions Bank and may lose value.