An asset mix is the percentage distribution of assets in a portfolio among the three major asset classes: cash and equivalents, fixed income and equities. The main benefit of achieving an appropriate asset mix is diversification, which is important because financial markets typically don’t move in the same direction at the same time. In a diversified portfolio, the positive performance of some investments could offset the negative performance of others. This can help reduce overall portfolio volatility.
- Stocks can offer significant growth potential for your portfolio, but they typically experience more value fluctuations than other investments, making them riskier
- Fixed-income investments, such as bonds and GICs, help preserve your capital and provide a steady income, though they usually don’t grow as much as equities
- Cash investments are generally very secure and highly liquid, enabling you to seize investment opportunities when they arise
What is an Asset Mix?
An asset mix refers to the combination of different types of assets that make up an investment portfolio. The asset mix is designed to balance risk and return, and it typically includes a combination of stocks, bonds, cash, and other types of investments.The asset mix is an important factor in determining the overall risk and return of an investment portfolio. Stocks, for example, are considered higher risk but also have the potential for higher returns, while bonds are generally considered to be lower risk but also have lower potential returns. A well-diversified asset mix can help to reduce the overall risk of a portfolio by spreading investments across different types of assets.
The optimal asset mix for a given individual or organization will depend on their investment goals, risk tolerance, and other factors such as age, income, and investment time horizon. For example, someone who is closer to retirement and has a lower risk tolerance may have a different asset mix than someone who is younger and has a higher risk tolerance. Asset mix is a crucial aspect of investment management and requires ongoing monitoring and rebalancing to ensure that the portfolio remains aligned with the investor’s goals and risk tolerance.
What is Your Risk Tolerance?
Many investment managers offer asset allocation ETFs that can do the work for you, providing a mix of stock and bond exposures with conservative, balanced, or growth risk targets; the key differentiator being how much of each fund is invested in stocks vs. bonds. The percentage you invest in each asset class may be the most important factor in determining your portfolio’s short- and long-term risks and returns.
Age
Sometimes referred to as “time horizon,” the stage of life you’re in can help dictate your investing style. The further away you are from expected retirement age the more risk you may be willing to take, knowing you have more time in the market ahead of you to potentially grow your assets and recover from any near-term losses.
Time Horizon
Saving for retirement is different than saving for a child’s education, which is different than saving for a house or a “once-in-a-lifetime” vacation. Knowing what you expect to need the money for, and when you’ll likely need it, can inform your investing choices. For many, it may help to think of your investments in layers, and segment it based on how soon you expect to need the funds.
Liquidity
In theory, the less you have to invest, the less risk you can take. That’s especially true the closer you are to retirement because you don’t have as much time to make up for losses. When you have ample money to retire comfortably, you can afford to take more risk as any potential losses can be absorbed and you can stay invested. For most investors, the trick is finding the right balance where you can grow your nest egg without taking on “too much” risk.
Appetite
Can you stomach short-term market volatility? How much risk are you willing to accept in the pursuit of your financial goals? These are very personal questions investors may want to ask themselves – and answer as honestly as possible. Just because you’re a “thrill seeker” in real life doesn’t mean you’ll feel the same about your investments, and vice versa.
Asset Allocation Funds
Asset allocation or balanced funds typically offer investors a more traditional mix of assets by class. These funds often disclose their asset mix to investors. Many people could use some help when it comes to choosing an appropriate mix of investments to reach their goals. When thinking about a long-term approach to investing, it’s helpful to know who you are as an investor. Another popular type of asset allocation fund is the target-date fund. These funds follow a glide path that adjusts the asset mix over time, managing toward a specific target date.
Conservative Investors
You tend to seek income and modest growth from your investments while avoiding the risk of losses. A typical portfolio will feature fixed income securities and a smaller amount of equities. This approach may be right for you if you have a lower tolerance for risk and are most comfortable with smaller shifts in the value of their investments. You will likely plan to hold your investments for the medium to long term.
Balanced Investors
You likely seek a balance between long-term growth and preserving your investments, while looking to create modest income. More than half of your portfolio may be invested in a diversified mix of Canadian, U.S. and global equities. This approach may be right for you if you have a moderate risk tolerance and plan to hold your investments for the medium or long term.
Growth Investors
You likely seek long-term growth over avoiding the risk of losses or creating regular income. You tend be comfortable with considerable shifts in the value of your investments. A typical portfolio will hold a diversified mix of Canadian, U.S. and global equities. This approach may be right for you if you have a higher risk tolerance and plan to hold your investments for the long term.
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