Skip navigation.
Go to the Principal Funds home page
Principal Funds - For Investors
Secure  Account Login

Select login type:

Quick Links
Fundamentals

Asset Allocation: Fundamentals

Risk is an inevitable part of investing. The good news is that risk can be managed. Asset allocation can help you reduce risk and enhance the potential of meeting your investment goals, although it does not guarantee a gain or eliminate the possibility of investment loss.

What is asset allocation?

Asset allocation is the process of combining stocks, bonds, and cash in an investment portfolio. Doing so creates a mixture of assets, each of which reacts differently to changes in the economy and financial markets.

  • Stocks (also referred to as equities): Have historically offered the best opportunity for long-term growth, but by assuming more risk and volatility, they have also produced a wider range of results.
  • Bonds (also referred to as fixed-income): Have historically earned returns within a much more narrow range, indicating that they are less risky than stocks, but still subject to interest rate risk and other risks. Their investment returns historically have also been generally lower than equities.
  • Cash: Offers the least risk, but also the least opportunity to grow an investor's money.

Combining all three types of assets in a portfolio manages risk by:

  • Reducing exposure to a single asset class and its related risks.
  • Giving the portfolio the potential to gain when each type of asset is in favor.

Learn more about diversification and how to choose asset classes for a portfolio.

What explains a portfolio's performance over time?

You may think that decisions about which individual assets to own and when to buy or sell them are the most important aspects of investing. However, according to two significant studies, the reality is that asset allocation policy has been responsible for determining more than 90% of a portfolio's performance variability over time. The choice of securities and timing of purchases and sales have a low impact on performance for long-term portfolios. This makes the asset allocation decision one of the most important decisions you will make as an investor.

pie showing how 93% of a portfolio's performance depends on asset allocation.

Source: Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, "Determinants of Portfolio Performance," Financial Analysts Journal, January/February 1995.

t110803049o


 

To obtain a prospectus, download online or call Customer Service at 1.800.222.5852

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. For more information about our funds, including their full names, please see the Principal Funds, Inc. prospectus or call Customer Service at 1.800.222.5852.

A mutual fund's share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.

This Web site was created and is maintained by Principal Funds Distributor, Inc. exclusively, and not by the Directors of the funds.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc., member of the Principal Financial Group®. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation and its affiliates, and Principal Funds, Inc. are collectively referred to as Principal Funds.

Not FDIC or NCUA/NCUSIF insured - May lose value - No bank guarantee - Not a deposit - Not insured by any federal government agency

Copyright © , Principal Financial Services, Inc.
Disclosures and Terms of Use | Privacy and Security