Build a sound investment portfolio with an effective asset allocation strategy - Money Matters

Today's investors are faced with a multitude of investment options, compounded by a host of questions that in many ways involve highly personalized decisions. For example, how much of your investment portfolio should be invested in stocks vs. bonds or cash? How often should you shift your mix of investments--if at all?

You may be surprised to learn that perhaps the most critical element in your portfolios performance is not your timing or investment selection, but rather, how you allocate your assets. Asset allocation is designed to help manage your exposure to risk. Allocating your investment dollars to different asset categories, such as stocks, bonds, cash and cash equivalents, can help manage your overall risk because losses in one category can be offset by potential gains in another, because these asset classes can often perform well or poorly at different times.

CUSTOMIZING YOUR PORTFOLIO

Your financial circumstances, investment goals, time horizon and risk tolerance are some of the major variables that come into play in your asset allocation strategy. Variable annuities can work well in an asset allocation plan because you can choose from a wide range of investment options that match your specific investment objectives, from pure stock subaccounts to pure bond subaccounts to those containing cash equivalents--or combinations of these!

For example, if your primary objective is capital appreciation, your asset allocation plan might include a large percentage of stock, or equity investment options, say 60 percent for growth potential, 30 percent in income-producing bond subaccounts and the remaining 10 percent in cash or cash equivalent investments, which provide some liquidity as a reserve.

On the other hand, if your goals are current income and asset preservation, your asset allocation strategy in your annuity may look something like this: 50 percent invested in income-producing bond funds, 30 percent in cash equivalent instruments and 20 percent in stock funds to provide growth potential.

In addition to providing a convenient method for allocating assets among the various investment categories, nonqualified variable annuities also offer diversification, professional management and tax deferral advantages. (1) It is important to note that as you age, financial circumstances and goals change, you should meet with your investment professional to re-examine your asset allocation mix and adjust your portfolio accordingly.

BUILDING A FINANCIAL PYRAMID TOWARD YOUR FINANCIAL SUCCESS

One approach to including all of the major asset categories in your plan is to have your investment professional work with you to structure a financial pyramid composed of the three major asset classes: cash and cash equivalents (foundation of the pyramid), bonds at the income level (midsection), and stocks (top section), for potential growth or appreciation.

A comprehensive asset allocation strategy will include a customized portion of each asset category based on your individual investment objectives. Keep in mind, the savings instruments or investments included in each level of the pyramid carry their own risk vs. reward tradeoffs.

1. The Pyramid's Foundation

The foundation's objective is to increase stability of principal. This level should include relatively lesser risk savings instruments and investments that are designed to preserve your assets. It should also include some liquid investments that will provide a ready cash reserve for emergencies. Although these investments offer greater security of principal, they typically don't earn yields that just keep pace with inflation, which can reduce your purchasing power over time when income taxes are taken into account.

Investment Alternatives: In this level you can include Federal Credit Union (FCU) product offerings or Federal Deposit Insurance Corporation--(FDIC) insured savings, money market products and certificates of deposit offered through banks or savings and loans. You may also consider including certain types of fixed annuities in the foundation level of your pyramid. Of course, such products are non-FDIC-insured and in exchange for higher growth potential, involve some investment risk.

2. The Bond or Income Level

The income level includes investments that offer a higher potential yield. Unlike the FDIC-insured bank products included in the foundation section mentioned above, these investments are NOT insured by the FDIC and the principal value and return on your investments may fluctuate with changing market conditions. However, as indicated earlier, in exchange for assuming a higher level of risk, you may increase your potential for higher earnings.

Investment Alternatives: In this income level of your pyramid, consider including fixed and variable annuities, as well as mutual funds that invest in bonds, tax-advantaged securities, and high-dividend stocks.

3. The Appreciation/Growth Potential Level

The investments included in this third level should provide the potential for capital appreciation and growth. As you move up levels of the pyramid, you typically assume a progressively higher degree of volatility than the previous level in exchange for potentially higher investment returns. The amount that you invest in this section of your portfolio and the types of investments that you choose will depend on several factors, including your investment objectives and risk tolerance.

Investment Alternatives: Examples of investments seeking appreciation are stocks, variable annuities, certain real estate and growth-oriented mutual funds.

SEEK HELP TO STRUCTURE YOUR ASSET ALLOCATION STRATEGY

Given the growing number of financial services products and ever-changing regulatory and tax law changes, it is advisable to turn to your investment professional, financial representative or tax consultant for the type of expertise needed. Like other important professionals you rely upon over the course of your life, financial professionals can help put you on the right track and keep you there. This is akin to seeking out a trusted physician when you need to get on the road to better health. Similarly, putting your trust in a knowledgeable financial professional can put you on the road toward a more fit financial future!

Variable Annuities are sold by prospectus. Such investments involve risks, including the possible loss of the principal amount invested. Before you invest or send money, please request and carefully read a prospectus. For certain investors, tax-free investments may be subject to federal, state or local taxes, or to the Alternative Minimum Tax (AMT). Variable Annuities and other investment products are offered through AXA Advisors, LLC, 1290 Avenue of the Americas, New York, N.Y. 10104. Variable annuities are long-term investment vehicles designed for retirement purposes. Withdrawals of taxable amounts are taxed as ordinary income and before age 59 1/2 may be subject to a 10 percent federal income tax penalty. Surrender charges may apply in certain cases.

(1) Withdrawals are subject to ordinary income tax and, if made before age 59 1/2, may be subject to a 10 percent federal tax penalty.

Mr. Richardson is a financial consultant and registered representative of AXA Advisors, LLC (member NASD, SIPC). 3141 Fairview Park Drive, Suite 250, Falls Church, VA 22042, (703)205-0310. Their Web site is: www.stevenrichardson.myaxa-advisors.com, and Mr. Richardson can be reached by e-mail at: [email protected]. Steven E. Richardson offers securities and investment advisory services through AXA Advisors, LLC (member NASD, SIPC) and offers annuity and insurance products through an insurance general agency affiliate, AXA Network, LLC and its subsidiaries. He is licensed to sell insurance, registered to offer securities and to offer investment advisory services in the following states: California (#0D95148), District of Columbia, Illinois, Maryland, North Carolina, Texas, Virginia and Utah. GE-23968 (06/02) (Exp. 06/04)

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