Asset Allocation and Risk Reduction

Asset allocation is the process of dividing investment dollars among a variety of asset classes, e.g., cash equivalents, bonds and stocks, or among sectors of an asset class such as short- and intermediate-term bonds. The primary reason for using asset allocation is to reduce the risk in your portfolio while maintaining or even enhancing your rate of return on investment.

In the investment world, typically, the greater the desired return, the greater the risk that must be assumed by you, the investor. Risk, in turn is controlled through diversification. The essence of asset allocation is the reduction of risk for a desired level of return through diversification across asset classes and asset sectors. Risk reduction can be further enhanced through the purchase of mutual funds, which offer greater diversification for your investment dollar versus buying individual securities.