Investment performance is impossible to predict. We all know that. What was hot last year might struggle this year. A booming economy can cool off. Volatility comes and goes, and we've seen that over the past several years, especially from 1998-2004.

That's why most professionals recommend spreading potential risks over many investments. Although there are no guarantees, the theory is that better performance from some investments may help offset weaker performance from others. This principle of diversification is known as asset allocation.

Asset allocation is a more sophisticated approach to diversification that ties your investments to a particular goal, time horizon and level of risk. A near-term goal may require a more conservative mix of investments while a long-term goal may allow for a more-aggressive mix.

Whatever your choices, they will no doubt be the single-most-important investment decision you can make. Studies indicate that more than 90% of the variability of portfolio returns is dictated by the asset allocation decision.*

Establishing an asset-allocation strategy, though, is just the first step. You'll want to constantly monitor your portfolio because the relative performance of various markets can shift your allocations. A portfolio established in 1995 with a 50/50 stock/bond split, for example, would have become 68% invested in stocks and 32% in bonds by the end of 1999 because of the late 90s stock market rally.** To ensure that your portfolio adheres to your desired allocation, you may want to rebalance your holdings at multiple periods during the year. Through the end of the 1990s rally, for example, that would have meant selling some of your stock holdings to buy more bonds.

At Fragasso Financial Advisors, we believe a properly diversified portfolio, tailored to a client's individual risk tolerance and rebalanced through a disciplined framework, is the key to generating favorable results for the long-term investor. We have structured our entire value proposition around the premise that asset allocation drives performance and that a portfolio's return is primarily a result of its asset-class exposure. Because we feel so strongly about this concept, we walk our clients through a process that allows for each individual to determine his/her proper asset allocation model. That process has four distinct steps:

1) Define your current financial situation.

2) Establish your goals and time horizon for each.

3) Find out what your risk tolerance really is.

4) Choose your investments.

Take the guesswork out of investing. Remember, the beauty of a solid asset-allocation strategy is the freedom it offers: freedom from constant worries about being in the right place at the right time and freedom from market timing decisions. Free yourself from those worries by taking the proper action to establish your own financial analysis and asset allocation strategy. We can help. Call us today.

* Source: Study by Gary Brinson, Brian Singer and Gilbert Beebower, "Determinants of Portfolio Performance II: AN Update," Financial Analysis Journal, May/June 1991.

** Source: Lipper Inc. Stocks are represented by the Standard & Poors 500 Stock Index. Bonds are represented by the Lehman Brothers Aggregate Bond Index. It is not possible to invest directly in an index. Past performance is no guarantee of future results.