Why Asset Allocation? Asset allocation is a fancier way of describing diversification. For Wall Street purposes, it’s a variation on “don’t put all your eggs in one basket.” That phrase is the bottom line for what’s known as Modern Portfolio Theory. Sounds complicated, but it’s nothing more than the reality that in the world of Wall Street, all investments do not always move in the same direction. In fact, with rare exception, their paths of progress differ considerably. Equities, more familiarly known as stocks, move up and down in reflection of the trend of profits of the underlying companies. When business is good, companies make more money and stocks go up. And vice-versa. Fixed-income holdings, most of which are bonds, rise and fall in price in response to changes in interest rates. When rates are rising, the prices of most fixed-income investments will fall. In the U.S., interest rates are largely controlled by the Federal Reserve Board as part of its ongo
Investment and economic observations by N. Russell Wayne, CFP, MBA. Mr. Wayne is the president of Sound Asset Management, inc. and former Managing Editor of The Value Line Investment Survey.