What is the right mix of stocks, bonds and domestic and international investments, as well as real estate, commodities and alternative investments? When investing in the stock market, you need to take into account two types of risk: systematic risk and unsystematic risk. It is important to understand the differences between them.

Systematic risk refers to the risk that affects the whole stock market and, therefore, cannot be eliminated. For example, any global turmoil will impact the whole stock market, not just any single company stock; similarly, any change in interest rates will affect the whole market, though some sectors will be more impacted than others. This type of risk is called nondiversifiable risk.

Unsystematic risk is the extent of variability in the stock or security’s return on account of factors that are unique to a specific company. For example, it may be possible that the management of a company may be poor, or some other company-specific issue may lead to losses. Since such factors are company specific, this type of risk can be diversified away by investing in multiple companies; that is why this risk is also called diversifiable risk.

To sum up, systematic risk affects the entire market as a whole, while unsystematic risk may affect only one particular company or sector. Therefore, the latter is avoidable, while the former is not.

To address the question of the “right mix” of investments, it is important to identify your overall personal wealth management needs. Let us break this down into a three-pronged approach. First, take a step back and examine the following, for guidance:

SEIA TARGET BALANCED MODEL ALLOCATION (As of Q2, 2012)

• Determine your needs and objectives.
• Assess your risk tolerance and what is suitable for you.

After going through the following steps, you will arrive at a strategic allocation that will match your stated goals and objectives. The second part of the approach is:

• Review a resulting asset allocation including specific classes and styles.
• Implement the strategic plan.

By following this comprehensive approach, you can rest assured that you will be getting high-quality advice, specifically tailored to your goals and objectives.

The third and most important step in achieving this desired “right mix” is:

• Rebalance and monitor.

The right mix will allow for the proper implementation of tactical allocation, to complement your strategic allocation. Tactical allocation is the process by which a prudent investor can take advantage of changes in investment outlook as micro trends present themselves within a business cycle. By implementing a successful tactical management strategy, an investor can take advantage of certain market anomalies and create value within a business cycle.

In conclusion, this so-called “right mix” is a moving target that requires constant due diligence utilizing a disciplined investment process to add long-term value through all economic cycles.