How your asset allocation can help you weather market ups and downs

Investing in stock and bond markets is one way to grow your money over the long term, but it comes with exposure to market volatility, or periodic price swings up and down.

Your investment mix can help you ride out market volatility while staying on track toward your financial goals. Asset allocation refers to how you divide your money among different asset classes — such as cash and cash equivalents; fixed‑income securities, such as bonds; and equities. It’s a key component of an investment strategy because it helps balance risk and reward.

Set your asset allocation by goal

You can use different asset allocations for the various accounts tied to your financial goals. For example, money you expect to need in the next few years, such as for a home down payment, should be invested in less risky assets, such as a bank savings account or money market fund. While this money may grow more slowly, it won’t be exposed to market downturns that could significantly reduce your savings.

Money you won’t need for many years — such as retirement savings 20 or 30 years into the future — can be invested more aggressively in assets with higher growth potential, including stock mutual funds and individual stocks. As you get closer to retirement, you can shift to a more conservative mix to help preserve the assets you’ve accumulated.

There is no single asset allocation that’s right for every investor. A common mix for long‑term goals is 60% stocks and 40% bonds. However, your specific allocation should reflect how much investment growth you need to reach your goal, your timeline and your comfort level with risk.

* For each asset class in the chart, the risk-and-return profile shown is in relation to the other two asset classes.

Asset allocation and market volatility

In addition to balancing risk and reward, dividing your investments among different asset classes can help you manage market volatility. Over long periods, stocks and bonds have historically generated positive returns. But each asset class carries different risks and behaves differently in shorter time frames. For example, bond prices may rise when stock prices fall, and vice versa.

Within asset classes, there are even more ways to diversify to protect against market swings, such as dividing money among stocks of small, midsize or large-cap companies, as well as international stocks.

Maintaining diversification through asset allocation helps as underperformance in one asset class may be offset by stronger performance in another. This can reduce the likelihood of a significant loss in your overall portfolio and may help you stick to your financial plan rather than selling out of the market during a downturn and missing subsequent gains.

If market volatility makes you uneasy, you may want to reduce your allocation to riskier assets to help you stay committed to your long‑term strategy.

Once you’ve set your asset mix, it’s important to review and update it at least annually — or whenever you experience a major life change, such as getting married or welcoming a child. If market movements cause your allocation to drift from your targets, periodic rebalancing will help bring your portfolio back in line with your original strategy.

Get professional guidance

To get assistance reviewing your asset allocation, contact your EY Navigate™ financial planner. Your planner can help you choose the best investments to align with your goals.