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A weekly review of trends, facts and tips for journalists
- The process of asset allocation can be overwhelming for many investors. Mark Riepe helps make sense of it all by exploring three aspects of asset allocation and what they mean for a portfolio.
- Some investors may be looking to hedging strategies to defend against financial loss. Rande Spiegelman offers hedging strategies and explains what makes a hedge effective.
GET THE MIX RIGHT
Mark Riepe, senior vice president, Schwab Center for Financial Research 
On the surface, asset allocation is a simple concept: it's the process of spreading out one’s portfolio across various asset classes. (By asset classes we mean different types of investments, such as stocks, bonds and cash.) However, upon further inspection, you may begin to feel overwhelmed by the many facets of asset allocation. To help you make sense of it all, we'll look at three important aspects of asset allocation and what they mean to your portfolio.
SPREAD YOUR MONEY OUT
Your asset allocation is responsible for a substantial portion of your portfolio’s performance. To illustrate, let’s imagine we have a pair of investors: Barry Brazen and Melvin Moderation.
Barry puts all of his money in U.S. stocks. He’s well diversified in his stock portfolio, but nevertheless, it’s all stocks. Like Barry, Melvin also invests in U.S. stocks. However, Melvin's approach to asset allocation varies from Barry's because he spreads his bets out a bit. Melvin owns not only the stocks of U.S. companies, but also a bit of cash, some bonds and a dash of non-U.S. stocks, as well.
When U.S. stocks are performing well, it should come as no surprise that Barry’s portfolio thrives when compared with Melvin’s. The late 1990s are a great example of this. However, when the U.S. stock market struggles, it will be very difficult for Barry's portfolio to outperform Melvin's because Melvin has diversified across asset classes that behave differently. And, as history suggests, Melvin's diversified portfolio will help him ride out turbulent times like, say, the infamous tech bubble of 2000-2002.
Media Contact:
Lara Edge
415-636-3386 or 415-636-5454
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HEDGING YOUR INVESTMENTS
Rande Spiegelman, vice president, financial planning, Schwab Center for Financial Research 
When you hear the word "hedge," you might imagine a row of shrubs that form a boundary around a yard. Or maybe the phrase "hedge your bets" comes to mind.
When it comes to investing, a hedge is simply a strategy to defend against financial loss, particularly if you have an overly concentrated position (which can be more like a bet than many folks realize). For example, if you have a large amount of a single stock as a result of your company's IPO, executive compensation or an inheritance, hedging might make sense.
Investment hedges can also be used to offset potential losses in part or all of a diversified portfolio when you're temporarily unwilling (or unable) to sell. For instance, if you have a large portfolio and you're worried the bottom may drop out of the market — but you don't want to sell and incur taxes on your gains — you might enter into a temporary hedge to protect your positions.
To be effective, a hedge should meet three basic requirements:
- The hedge must make investment sense.
- The hedge must be tax-effective.
- The hedge must make sense considering all costs involved, including opportunity costs and the timing of cash flows.
Media Contact:
Lara Edge
415-636-3386 or 415-636-5454
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IMPORTANT DISCLOSURES
This information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice or an offer or solicitation to purchase or sell any particular security. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. The strategies mentioned may not be suitable for everyone. Each investor needs to review investments and strategies in light of his or her own particular situation. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA and/or attorney. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
All expressions of opinion are subject to change without notice. All research has been compiled from publicly available, proprietary and/or licensed data. Past results are not indicative of future performance.
Charles Schwab & Co., Inc. (Member SIPC) is a subsidiary of The Charles Schwab Corporation. The Schwab Center for Financial Research is a part of Charles Schwab & Co., Inc.
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