Financial Strategies Group

FINANCIAL STRATEGIES GROUP 12 In order to be truly diversified, you should own a number of funds that are all investing in different types of stocks and bonds (asset classes). Different asset classes can perform differently depending on the market. By utilizing asset classes that experience different returns, investors may lower their overall risk and improve long term returns. There are arguably dozens of different asset classes from which investors can choose. This can be overwhelming, so my advice would be to keep things simple. Some of the most common asset classes that should fit in most investor portfolios are listed on the left. Using these asset classes weighted towards an appropriate risk level, investors can build a diversified long term portfolio. Morningstar.com is a great resource for understanding more about asset classes. 3. Rebalance Rebalancing is the process of realigning a portfolio to its desired asset allocation. This widely accepted investment principle helps a portfolio maintain its desired level of risk and diversification. Imagine a portfolio consists of 50% stocks and 50% bonds. Since stocks outperform bonds over long periods of time, eventually, the stock portion of the portfolio will be significantly larger than the 50% you intended. Left unchecked, this could expose investors to unwanted and unnecessary risk. Rebalancing essentially sells some of the asset class that has grown to be larger than desired and buys the asset class that is smaller than desired. If, for example, a 50% stock 50% bond portfolio had shifted to become 60/40, an investor would sell 10% of the stocks and purchase 10% bonds. There are a variety of different opinions as to how often investors should rebalance. The most common frequencies are quarterly or annually. Due to the amount of time and effort it can take for most DIY investors to rebalance, annually should suffice. This will also help reduce potential transaction costs better than a more frequent strategy. Large Cap U.S. Stocks Mid Cap U.S. Stocks Small Cap U.S. Stocks International Developed Stocks Emerging Market Stocks Real Estate Cash Corporate Bonds Governments Bonds

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