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Accumulation planning addresses an individual’s investment needs, asset allocation, and the suitability of different types of securities in light of their goals and risk tolerance.
In today’s world, there are common needs and desires that most people seek to accomplish. To protect their ability to earn and accumulate wealth, many people choose to hold insurance policies, as well as maintain an emergency fund which helps to guard against depleting savings that are intended for other goals.
Asset allocation, the process of determining how and where your money is invested, is used to distribute your investable assets among a variety of investment categories.
This process will:
– Reduce overall investment risk
– Create more reliable investment forecasts
– Improve the risk/return trade-off of your portfolio
Accumulation planning also involves the choice of securities for your investment portfolio. Basic securities are stocks, bonds, and mutual funds. Separately managed accounts, indices, option strategies, short-term assets, and annuities are also used to optimize your portfolio based on your accumulation goals.
Alternative investments may also be an option for the right investor. One of the premier benefits of alternative investments is diversification. This results from the inclusion of investments that react differently to the markets than more traditional investments. Managed futures, hedge funds, oil and gas, tax shelters, and real estate are all examples of alternative investments. These products generally involve substantial risk and limited liquidity.
Certain investors may require different expertise than typical stock and bond portfolio management. Employer-related retirement plans and stock options, margin strategies, and real estate exchanges, may require a more seasoned financial advisor with a larger area of expertise.
Most investors understand that as risk increases, the potential for return also increases. But there is a point for every individual where the level of risk is not worth the potential return. The goal of asset allocation is to provide you with the risk/return scenario that is most comfortable for you, based on your risk tolerance and personal financial goals.
- What type of investments are available to the average person?
Stocks are probably the most well-known option, but picking and choosing individual companies to invest in is not how most people get involved in the market. Instead, you might want to consider an index fund, which invests in the securities included in indexes like the S&P 500.
- I keep hearing it’s crucial to be diversified. Why?
In a nutshell, diversification means you don’t have all your eggs in one investing basket, which may help protect you if any part of your portfolio falters.