by Meghan Councill

We’ve spent some time talking about stocks and bonds, but now I want to expand our vocabulary to include other terms you will hear often when discussing investments. Let’s start with Asset Allocation, which is the combination of various asset classes, such as how much you have in stocks, bonds and cash. Combining asset classes helps reduce the risk of owning any one in particular. Considerations when deciding on your asset allocation are your goals, ability to tolerate risk and your investment time horizon.

Benchmark (or Index) is another popular term, especially when comparing your returns. You may have heard someone say, “This strategy has beaten the S&P… . A benchmark is just a basket of stocks that represents a specific group. The S&P 500 Index is one of the most common benchmarks that is often referred to as “the Market.�� It is a basket of the 500 largest publicly traded U.S. companies. You may also hear about “the Dow,” which is short for the Dow Jones Industrial Average (DJIA.) This index is comprised of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ and is a price-weighted average of those stocks. The DJIA has been around since 1896 when Charles Dow invented it.

As you have seen in our previous columns, you can invest in any combination of stocks, bonds, cash, separately managed accounts, mutual funds (open or closed end,) ETFs that are active or passive and other complex investments that we have not yet discussed. You can do this yourself, with an advisor or through a robo-computer-based company. How you go about investing brings another list of terms.

If you are concentrated this means that you are invested only in a few securities (which takes on the most risk.) If, on the other hand, you are diversified this means you have your money spread across many securities (which generally decreases risk.)

Asset allocation is an important way to diversify and there are three main types. Strategic Asset Allocation sticks to a defined policy and passively/systematically rebalances to that policy. Tactical Asset Allocation makes tilts around a defined policy, but does not deviate too far from it. Dynamic Asset Allocation is not wed to a policy at all and can have access to all, none, or some combination of available asset classes. Each investor has a different set of goals, tolerances and timelines and those will change over the course of one’s life so there truly is not one answer that fits all. Financial planning is a dynamic process that will evolve over time as changes in your life occur. Monitoring your investments throughout these changes in your life and making necessary moves is one of the best things you can do for yourself and the future of your investments.

Compounding is another term that you should take interest in and is the phenomenon of growing exponentially vs linearly. For example, a $10,000 investment with a 10 percent return for 20 years would result in $67,275. That same investment invested for twice the time (40 years), would not result in only twice the money, but nearly 7x the money at $452,593. A quick rule of thumb for estimating how frequently money will double is the Rule of 72. Simply stated 72/Return = # of Years to Double Your Money.  For example, with a return of 10 percent, your money would double in roughly 7 years (72/10 = 7.2) The more money you put away and the earlier you start, the more time your money will have to compound. This brings to mind the old adage, “Time is money.”

Diversification and Asset Allocation does not ensure a profit or guarantee protection against a loss. An index is not available for direct investment therefore its performance does not reflect the expenses, fees, and taxes generally paid with the active management of an actual portfolio.

The information provided is for information purposes only and should not be considered an individual recommendation or personalized investment advice. Each investor needs to review his or her particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed. Investing in stocks and the equities market always carries risk. Equities are subject generally to market, market sector, market liquidity, issuer and investment style risks, among other factors, to varying degrees.

The statements and opinions expressed in this article are those of the authors as of the date of the article, are subject to rapid change as economic and market conditions dictate, and do not necessarily represent the views of Davenport & Company LLC. This information may contain forward looking predictions that are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. This article does not constitute investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. Investing always carries risk.

MEGHAN COUNCILL is a Registered Representative with Davenport & Company LLC. Member NYSE-SIPC-FINRA