Definition Asset allocation refers to the investment strategy of balancing risk and reward by proportionally distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. The three main asset classes - equities, fixed-income and cash and equivalents - have different levels of risk and return, so each will behave differently over time.
Key Components Equities (Stocks): Generally considered growth investments, offering potential for higher returns but with increased volatility and risk.
Definition Buy and Hold is an investment philosophy that involves purchasing securities and holding them for an extended period, regardless of market conditions. It is based on the belief that, despite short-term fluctuations, the market will grow in the long run, allowing investors to benefit from price appreciation and dividends.
Components of Buy and Hold Investment Horizon: The Buy and Hold strategy requires a long-term investment horizon, often spanning several years or even decades.
Definition Diversification is an investment strategy that involves spreading your investments across various financial instruments, industries and other categories to reduce risk. The principle behind diversification is that a varied portfolio will yield higher returns and lower risks than any individual investment within the portfolio.
Importance of Diversification Diversification is essential as it helps mitigate the risk of loss if one investment or sector underperforms. It also provides the potential for better returns as different sectors and assets perform well under different economic conditions.
Definition Dollar Cost Averaging (DCA) is an investment strategy that involves regularly investing a fixed dollar amount into a particular asset or portfolio over a specified period, regardless of the asset’s price. This method reduces the impact of volatility by spreading out the investment over time, which can lower the average cost per share and reduce the risk of making a large investment at an inopportune time.
Importance of Dollar Cost Averaging Risk Mitigation: By investing consistently over time, DCA reduces the risk of making a large purchase when prices are high, thereby minimizing the impact of market volatility.
Definition Growth investing is an investment strategy that focuses on identifying and investing in companies expected to grow at an above-average rate compared to other companies in the market. This approach typically involves targeting stocks of companies that show signs of accelerated growth in earnings, revenue or cash flow, even if their current price-to-earnings (P/E) ratio is high. Growth investors are less concerned with short-term profits and more focused on long-term capital appreciation.
Definition Portfolio rebalancing is the process of realigning the weightings of assets in an investment portfolio to maintain the desired level of risk and return. Over time, as different assets grow at different rates, the original asset allocation can shift, potentially exposing the investor to more risk than intended. Rebalancing involves selling or buying assets to bring the portfolio back to its target allocation, ensuring that the investment strategy remains aligned with the investor’s goals and risk tolerance.
Definition Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors seek out companies that the market has undervalued, believing that their true worth will eventually be recognized, leading to price appreciation. This strategy is based on the idea that the market overreacts to both good and bad news, causing stock prices to fluctuate more than their underlying fundamentals justify.