You may think that to be a successfulinvestor, you need to have athorough understanding of thestock market, follow the latest trends, andcarefully choose the right stocks at theright time. Although this insight can behelpful, it is not essential. In fact, individualsecurity selections and market trendsmay be far less important than the proportionof your portfolio allotted to differenttypes of investments and diversificationwithin those categories.
Investing can be like any game ofstrategy. In this case, it's a commitmentto your financial future. Effective strategiesand thoughtful planning are theequipment you'll need to get into theinvesting game. A solid plan and diversified approach can help minimize risk andprovide the kind of returns that youneed for your future.
Building a portfolio following theprinciples of asset allocation is the firststep. Investments are categorized intodifferent types of asset classes such asstocks or stock funds, bonds or bondfunds, and cash equivalents. Rather thanplacing all of your money in one type ofinvestment, the concept of asset allocationdictates that you distribute yourinvestments between these asset classes.Historically, different asset classes havereacted differently to changes in theeconomy. By allocating your portfoliointo multiple asset classes, you may actuallyreduce risk and improve returns.
In fact, research has shown that morethan 91.5% of a portfolio's overall performanceis determined by asset allocation.Compared to the selection of individualinvestments (4.6%) and markettiming (1.8%), asset allocation is the wayto invest. People spend a lot of time andenergy trying to follow the market andpick the best stocks or mutual funds, butfor the successful long-term physician-investor,these factors are almost irrelevant.Asset allocation can be far moreimportant than which stocks, bonds, ormutual funds you select, and at whatpoint in time you invest.
Once you have developed a soundinvestment plan and appropriate assetallocation based on your financial goals,time frames, and risk tolerance, you havetaken the first step to financial independence.Asset allocation is not a one-timetask; it is a process that needs to be revisitedregularly. Your asset mix should beperiodically reviewed and rebalanced tokeep pace with changing circumstancesfor asset allocation to work best.
Different life stages also affect yourfinancial goals and the strategy you haveplanned. Marriage, having children, buyinga home, and retirement are all circumstancesthat affect your financialneeds. For example, the asset allocationstrategy that one might put together asa young, single person focusing ongrowth would be very different from thestrategy one would need after retirement,where the focus would be moreon preserving capital and generatingincome. Formulating the right asset allocationwill help you feel comfortable andconfident in achieving all of your financialgoals and dreams.
wealth advisor and owner of
Connington Wealth Management
Group in Pine Brook, NJ. He specializes
in working with physicians
and health care professionals who
are committed to developing a comprehensive,
long-term approach to improving their quality of
life while working toward a more secure future. For
your free report, "Alternative Investments for Medical
Professionals,"call 973-808-8181 or visit www.conningtonwealth.com. Securities offered through
Linsco/Private Ledger, member NASD/SIPC.
William J. Connington III