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Intro to stocks

Asset Allocation

Although equities (stocks) should comprise a major portion of most portfolios, they are by no means the only asset class to consider. In fact, asset allocation or choosing the right mixture of different asset types, including stocks, bonds, and cash investments, is a critical part of investing. A well-designed asset allocation strategy can make the difference between a legitimate investment plan featuring a well-diversified portfolio and a mish-mash of investments.

Indeed, several studies have been conducted within the retirement planning industry to determine what factors most influence the investment performance of pension funds. Overwhelmingly, researchers have concluded that the number one factor influencing performance has been strategic asset allocation (the mix of assets). Effective asset allocation was found to be responsible for 91.5% of pension fund performance. In contrast, factors such as market timing (buying low and sell high) and choosing individual securities account for only 8.5% of pension funds' results.

In other words, creating a diversified portfolio with exposure to a range of stocks and bonds as a long-term investment is more important than trying to cash in on momentary market mania. Daily market events make great headlines, but usually they don't make much difference over the long term. There are those who do get rich by playing the market - however, they are almost always professional investors and their success stories are few and far between.

Your portfolio's ideal mix of stocks, bonds, and other assets depends largely on your investment time horizon and your individual risk tolerance level. The next section will address these issues.

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