The Market & You

The primary factor affecting your investment decision is your time horizon — the amount of time that you reasonably expect to have your funds invested. Time impacts cash/cash equivalents, bonds (fixed income), and stocks (equities) in different ways. Cash equivalents (e.g., money market accounts or Certificates of Deposit) pose little risk to principal, but may suffer tremendous erosion from the effects of inflation. Bonds react inversely to changes in interest rates, losing value as rates rise. Equities must be considered as long-term investments. Because of their short-term volatility, investing in stocks for periods of less than five years carries a significant risk of loss of principal. Determining a reasonable time horizon for your portfolio will provide a starting point for the division of assets among these major classes of investments.

A number of academic studies have concluded that the bulk of a portfolio’s return is determined by simple asset allocation — dividing the portfolio into a selected percentage of stocks, bonds, and cash. Over longer periods of time, stocks behave like stocks, bonds like bonds, and cash like cash. Actively managing a portfolio through security selection and/or market timing increases related expenses but adds little to the total long-term return. In most instances, security selection and market timing become detractors from return.