When it comes to investing toward any type of long-term goal – like retirement – much is made of market conditions. Investors are constantly bombarded with commentary on market volatility, speculation on growth, etc.

And while market conditions certainly play a role in your portfolio’s performance, arguably the most important consideration for investors should be their overall asset allocation.

You can think of your asset allocation as the combination of investments in your portfolio; and determining that mix of investment types can greatly influence your overall performance across a variety of market conditions.

Why diversification matters

A diversified asset allocation is basically the investment equivalent of the phrase, “Don’t put all your eggs in one basket.” A portfolio too heavily weighted in any one area could experience significant losses if that sector or security suffered a setback. A diversified portfolio, on the other hand, could benefit from gains in one asset class, even when other assets are declining.

With a diversified asset allocation, every investment has different strengths that allow them to play a specific role in your overall strategy. Some investments may be chosen for growth potential. Some may provide regular income. Others may serve as a temporary place to hold money and limit risk exposure. Some may even fill more than one role.

To put this in another light, it’s not uncommon to have multiple financial goals, each with different time horizons – buying a house, saving for a child’s education, retirement, etc. As such, you need a combination of investments to help you balance your short-term needs with these longer-term goals.

Striking a balance that’s appropriate for you

There’s no one-size-fits-all approach to diversification.

The asset allocation appropriate for you is going to depend on numerous factors personalized to you, including your unique financial goals, time horizon, tolerance for risk and more.

At one end of the spectrum is a conservative approach, structured to generate income and preserve your principal balance. This approach is often used by investors with a shorter time-horizon. A conservative asset allocation is likely to be more heavily weighted in bonds and cash. This helps limit risk exposure, but also tends to limit the ability to generate greater returns.

At the other end of the spectrum is a more aggressive model, geared toward longer-term growth. This approach is often used by investors with a long time horizon like a retirement that might be 10-20 years down the road. An aggressive asset allocation is likely to be more heavily weighted in stocks and stock funds. They tend to have a higher risk exposure, but may also have the opportunity to generate higher returns.

By having a firm understanding of your goals, time horizon, and appetite for risk, you can begin to gauge how much of each asset class to include in your portfolio.

Diversifying within an asset class

Once you determine the appropriate mix of stocks and bonds, you might want to consider diversifying within each asset class as well. For stocks, you could allocate across large cap stocks, mid cap stocks, etc. You could also allocate based on geography by putting some money in U.S. stocks and some in international stocks.

For bonds, you might allocate based on maturity date, with some maturing sooner and others later. Or, you might favor tax-free bonds depending on your tax situation and the type of account the bonds are held in.

Beyond stocks, bonds and cash, you might want to diversify into other asset classes including real estate or alternative investments like hedge funds or private equity funds. Keep in mind that all investing involves risk and asset allocation and diversification do not ensure a profit or prevent loss.

Here to help

If it sounds complicated, don’t fret. We’re here to help. A PNC Investments Financial Advisor can talk with you and help develop an appropriate asset allocation strategy for you and your goals, designed to perform across a variety of market conditions.

For more information on asset allocation and diversification, or to discuss your personal situation in more detail, contact a PNC Investments Financial Advisor. Simply dial 855-PNC-INVEST to get started.