Introduction to Asset Allocation
Your investment goals are unique to you.  An important step toward achieving your goals is to include the appropriate mix of assets in your portfolio. This mix, known as ‘asset allocation1,’ is the balance of equities (stock), bonds (fixed income) and cash (or cash alternatives) within your portfolio.  A core objective of asset allocation is to potentially increase the overall return for a given degree of risk, or to reduce the overall risk of a portfolio for a targeted level of return.  Before deciding on your allocation you should consider your investment goals and your level of risk tolerance.

Investment Goals, Time Horizon, and Risk Tolerance
Are you looking to generate a predictable stream of income to meet living expenses?  Or do you want to generate capital growth?  Are you investing for retirement?  If so, what is your retirement timeframe (5 years, 10 years, or more)?  You should clearly define your investment goals and horizon.  

A key to setting investment goals is to balance return expectations with your willingness to accept risk.  It is important that you are comfortable with the amount of risk in your portfolio so that you will be able to stick with your investment strategy even through turbulent times.  

You should strive to establish realistic expectations and carefully determine the appropriate investment time-frame for an investment plan.  You may have multiple goals impacting your investment strategy, and accordingly may have multiple time horizons.  Typical goals include payment of college tuition for your children, purchase of a home and retirement, among many others.

Revisit and Rebalance Your Allocation Regularly
Your investment goals, time horizon, and risk tolerance will evolve over time – your asset allocation should change with them.  At the beginning of your career, you may be willing to take on more risk, as you have time on your side to recoup losses.  You and your Financial Advisor may determine that it is appropriate to include a relatively high allocation to equities at this stage, as well fixed income instruments which focus on capturing high yields.  

As you accumulate wealth, your needs may expand to include the purchase of property, the cost of education and impending retirement.  You and your financial advisor may determine that you should reduce your exposure to riskier investments and increase your allocation to more highly rated investments, such as investment grade corporate bonds, mortgage backed securities and, if appropriate, tax-exempt municipal bonds2

Near the end of your career, you may have a much lower tolerance for risk as you look toward retirement and spending some of the wealth you have accumulated.  Your focus may shift to income generation and principal protection at this stage, and you and your Financial Advisor may transition your allocation toward high quality fixed income instruments and away from more volatile securities.   

Equally important is regular rebalancing of your portfolio to maintain your target allocation3.  As markets change and different assets appreciate and depreciate differently, the relative weightings of each sector, geographic region, and asset class in your portfolio will change.  In order to keep your asset allocation in line with your long-term strategy, it is important to revisit and rebalance your portfolio regularly.  

Investment Strategy
The key to building a diversified portfolio is to make sure that your investment decisions are consistent with your financial objectives and long-term plans.  By taking the time to understand your investment objectives and style, as well as the investment choices available, you can develop an asset allocation strategy that is right for you.  Your Morgan Stanley Financial Advisor is available to review your financial goals and level of risk tolerance with you, and to help you build a balanced and diversified portfolio.


1 Asset allocation and/or diversification does not assure a profit or protect against loss in declining financial markets.

2 Municipal bonds are generally exempt from federal tax.  Typically, state tax-exemption applies if securities are issued within one’s state of residence and, local tax-exemption typically applies if securities are issued within one’s city of residence. Some bonds may be subject to the alternative minimum tax (AMT).

3There may be tax implications with a rebalancing strategy.  Please consult your tax advisor before implementing such a strategy.


The market value of fixed income securities may fluctuate, and if sold prior to maturity, the price you receive may be more or less than the original purchase price or maturity value.

The value of an equity security changes daily and can be affected by changes in interest rates, general market conditions and other political, social and economic developments, as well as matters relating to the specific company itself. Before investing in equities you should be willing and able to accept these risks.

Articles are published for general information purposes and are not an offer or solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives. Morgan Stanley Smith Barney does not render advice on tax or tax-accounting matters. Clients should always check with their tax and legal advisor before engaging in any transaction involving IRAs or other tax-advantaged investments. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws.

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