Start 2007 Off Right: Review Your Asset Allocation
Texas CPAs Remind Investors to Avoid Putting Their Eggs All in One Basket

DALLAS — One of the best ways to maximize the long-term performance of your investment portfolio is through proper asset allocation. The term asset allocation refers to how you divide your investments among the three key asset classes – stocks, bonds, and cash-equivalents. In other words, it means not putting all your investment eggs into one basket.

According to the Texas Society of Certified Public Accountants, research has shown that 90 percent of overall portfolio performance is determined by asset allocation – and not by the actual investments you select or your ability to time the market. Thus, asset allocation is essential to building your financial future.

WHY ASSET ALLOCATION IS IMPORTANT
Asset allocation works because each of the three key asset classes tends to react differently to economic events and market conditions. In some years, stocks fare better than bonds. In other years, bonds may outperform stocks. Determining which asset class will do best in a given year is difficult – even for professional investors. But by dividing your assets among the three major asset classes, you spread out both your opportunities and your investment risk.

LET YOUR NEEDS DRIVE THE PROCESS
The proper asset allocation for you depends on a number of factors including your age, financial goals, risk tolerance, time frame, and overall financial situation. Taking these factors into consideration helps to ensure that your asset allocation strategy is appropriate for you -- neither too aggressive nor too conservative.

Generally, younger investors can allocate more of their investments to stocks, because they have more time to weather short-term drops in the market. Investors with a longer investment time horizon should consider investing 80 percent of his or her assets in stocks and 10 percent each in bonds and cash.

On the other hand, if you plan to retire in a few years, are likely to need your money in the short-term, or have a very low tolerance for risk, you might take a more conservative approach. For example, you could invest 40 percent of your portfolio in stocks, 40 percent in bonds, and 20 percent in cash. Since some growth is important in all portfolios, CPAs generally advise that even conservative investors and those in retirement keep some percentage of their assets in stocks.

DIVERSIFY WITHIN ASSET CATEGORIES
After you allocate your investments over the three broad asset classes, you need to go a step further and diversify the investments within each asset class. For example, your stock portfolio should include investments in several different industries and sectors, such as technology, healthcare, financial services, and consumer products. It’s also a good idea to include both domestic and international investments, since different economies may experience ups and downs at different times.

REBALANCE REGULARLY
The beginning of the New Year is an opportune time to review your asset allocation. Revisit your investments and goals regularly to determine whether your asset allocation still makes sense. For example, as you move closer to retirement, you may want to begin to gradually move some – but not all – of your assets out of stocks and stock funds.

Over time and as a result of performance, the value of the various assets within your portfolio will change. For example, if your stocks do particularly well one year, your portfolio may turn out to be more heavily weighed toward equities than you originally intended. To rebalance, you may want to sell some stock and reinvest the money in bonds or cash. Or if you have additional money to invest, you can invest those dollars in bond or cash funds.

CONSULT WITH A CPA
Make an appointment with a CPA today. He or she can help you review your asset allocation and make any necessary adjustments.

PERSONAL FINANCE INFORMATION
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ABOUT TSCPA
TSCPA (http://www.tscpa.org) is a nonprofit, voluntary, professional organization representing Texas CPAs. The society has 20 local chapters statewide and has 27,000 members, one of the largest in-state memberships of any state CPA society in the United States. TSCPA is committed to serving the public interest with programs that advance the highest standards of ethics and practice within the CPA profession.