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Asset Allocation and Periodic Rebalancing

A One-Two Punch to Help Minimize Volatility

Successful investing requires planning and discipline. Luckily, planning and discipline go hand in hand. Proper planning helps you gain confidence in your investment strategy. This confidence will foster the discipline necessary to allow your investment strategy to work for you.

Planning a personalized investment strategy requires you to consider your tolerance for investment risk. Your Stifel Financial Advisor will help you determine your risk tolerance by working with you to complete Stifel’s Risk Tolerance Questionnaire. The results will be used to construct an asset allocation consistent with your personal risk tolerance profile.

Asset allocation is a process that involves selecting a mix of asset classes – stocks, bonds, and cash – that are suitable for your goals, risk tolerance, and time horizon. Investments within these three broad classes can be further diversified in a number of ways. For instance, your stock investments may include a mix of small, mid, and large cap holdings and/or foreign and domestic stocks. Your bond holdings may feature some combination of corporate and government bonds along with other fixed income investments. The theory behind asset allocation is that a diversified portfolio may experience less volatility due to the fact that different asset classes respond differently to varying market conditions. Positive returns experienced by one asset class may help offset losses in another asset class.

Once you’ve worked with your Stifel Financial Advisor to determine which asset classes to include in your portfolio, you will need to assign a percentage to each asset class before selecting the corresponding investments. Over time, the various investments that make up your portfolio will earn differing rates of return, throwing your original weightings out of balance and potentially exposing you to too much – or not enough – risk. That is why it is important to make periodic adjustments using a process known as rebalancing.

To rebalance your portfolio, you sell shares of high-performing assets and use the proceeds to purchase underperforming assets. For instance, say you initially decide to invest 60% of your portfolio in stocks and 40% in bonds. If a bull market causes the value of your stock holdings to grow while the value of your bond holdings decreases, your portfolio will be too heavily weighted in stocks. This could expose you to more risk than you are willing to tolerate. In order to rebalance your portfolio to maintain your desired 60/40 allocation, you must sell some of your stock holdings and purchase additional bond holdings. By working with your Stifel Financial Advisor to periodically rebalance your portfolio, you will ensure that your asset allocation strategy stays in line with your risk tolerance and investment objectives.

Call your Stifel Financial Advisor today to begin planning your personalized investment strategy. With proper asset allocation and periodic rebalancing, you can set a course toward your financial goals.

Asset allocation does not ensure a profit or protect against loss. Rebalancing may have tax consequences, which you should discuss with your tax advisor.