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When it comes to investing, there’s a lot of terminology and jargon you might see bandied about by financial professionals or the media. Most of these terms are not hard to understand – but they may seem baffling at first glance.

Understanding some basic investing terms is helpful, because it can help transform investing from some arcane art into a simple process. And the more you see investing as a process based on rules and logic, rather than something based on emotions, the more likely you will find success.

One important term every investor shoulder understand is asset allocation.

Improper asset allocation is one of the most common mistakes an investor can make. Why is asset allocation so important? Look at it this way: If you were to eat only one food every day for your entire life, your body would be very unhealthy. If you were to exercise only one group of muscles for your entire life, your body as a whole would be very weak. And when you invest all your money in the same way, the same could be true of your finances.

Asset allocation is basically a strategy that spreads your investments across different “asset classes.” The three main classes are equities (stocks), fixed income (bonds), and cash. There are other classes, of course, like commodities and real estate. And there are sub-classes as well. For example, “stocks” can be divided up into many different classes, like international stocks, small, mid, and large-cap stocks, etc.

The thinking behind asset allocation is that by mixing your investments within these different classes, you take on less risk. That’s because if one class goes down in value, the other classes you’ve invested in can compensate.

Here’s an example of why asset allocation is so important. Let’s say that in Year 1, the stock market goes through the roof. So you put all your money into stocks. But in Year 2, the stock market performs poorly.  It’s possible you could end up losing a lot of money.

Now let’s say that instead of putting all of your money into stocks, you put 50% into the bond market. When the stock market went down, investors started pouring their money into bonds, causing bond prices to go up. That means that even though your stock holdings decreased in value, your bond holdings increased, meaning you could still break even or possibly come out ahead.

Of course, this is a very general, very simplified example. I’m certainly not recommending you do anything like that. (I would never recommend any particular investment or strategy to anyone without first sitting down and learning more about their goals, needs, challenges, and fears.) But hopefully it illustrates the point: Putting all your eggs in one basket is rarely a good idea.

If you have more questions about asset allocation or any other investing topics, please give me a call today at 303-741-9772 or contact us here.

Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns. Asset allocation does not guarantee a profit or protection from losses in a declining market.

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Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Dechtman Wealth Management, LLC [“DWM”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from DWM. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. DWM is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the DWM’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.dechtmanwealth.com.

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