One of the first steps to achieving your financial goals while limiting risk is constructing a target asset allocation for your portfolio. By diversifying within and across asset classes you can limit your risk while achieving potential returns consistent with you investment strategy.
The following sample portfolios and discussions should help you determine your optimal asset allocation strategy given your personal investment goals, time horizon and risk tolerance. For your convenience, we have constructed four typical portfolios for investors with varying goals, time horizons, and risk preferences.
First, consider the risk-return characteristics of each sample portfolio style:
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Performance Metrics of Sample Portfolios
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This chart represents the performance of four sample portfolios over the period 1996 - 2005. The top numbers on each of the "candlesticks" represents the best yearly performance of the portfolio, and the bottom number represents the worst yearly performance. The middle number shows the average yearly performance of each portfolio. Click here for source data.
Another way to visualize risk-return is to see how these portfolios performed historically (note that past performance does not guarantee future return). The following graph plots a hypothetical $1,000 investment in 1995 in each of the above sample portfolios. As you can see, the more aggressive approaches earn a higher return, but with higher volatility. The volatility of the overall portfolios, however, is significantly below that of any particular asset class (excepting bonds & cash), which demonstrates the value of diversification. The interesting convergence of these results in 2002 and subsequent divergence demonstrates how volatility can affect returns over the long- and short-terms. A summary of these hypothetical results is given below. Click here for source data.
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Comparison of Hypothetical $1,000 Investment in 1995
Various Sample Investment Portfolios
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As you can see, the more aggressive the portfolio the higher the upside and downside potential in any year. You should carefully consider your personal financial situation and the amount of risk you are willing to take.
Next, it's time to decide which portfolio is right for you given your goals.
Click here for sample portfolios.
Zecco Trading, Inc., is not a tax advisor. The Internal Revenue Service Code that governs IRAs is complex, and state tax laws regarding IRAs may differ as well. We recommend that you consult with a qualified tax advisor as you formulate your retirement planning needs.