All investors – be they conservative, moderate or aggressive – need to understand that the level of return they expect to generate is directly related to the amount of risk they are willing to assume – the higher the return, the higher the amount of risk. Regardless of where you put your money, you assume some element of risk.
Investors are prone to many behavioral mistakes that can cost them dearly. Trying to time the market, trying to pick the winners, chasing returns, trying to go it alone are among the most common. But the one that can inflict the most damage over a period of time is when they succumb to investing inertia.
Most people looking to implement a financial plan are making decisions with the long term in mind. While what long term means tends to vary depending on factors like age, individual, and family goals, it’s safe to say most planners and their clients would agree that long term is usually measured in years not months.
When it comes to our actions, we rely 99% on our rational decision-making and 1% on our emotions, and it’s often that 1% that actually triggers action. So, instead of following the rational line of thought that we so carefully forged in the left side of our brain, our actions are skewed by whatever emotion is swirling around in the right side.
Asset allocation has become an established investment strategy for those who understand the long term nature of investing and the need to achieve an optimum level of portfolio balance and diversification in order to mitigate risk and achieve more stable returns.