In order to be successful in reaching your long–term financialgoals, it is best to implement a varied approach that considersboth strategic asset allocation and diversification. With thehelp of an experienced Financial Advisor, you can review yourfinancial portfolio to see if your current investment strategy incorporatesboth.

Before you can properly allocate and diversify your portfolio,you must understand what the basic principles encompass. Assetallocation aims to balance risk by dividing an investor’s assetsamong three major categories – stocks, bonds and cash.

Each type of asset has a different level of return and risk,so each will impact your portfolio differently. Asset allocationtakes into account the different ways stocks, bonds and cashhave performed historically and uses those characteristics to improvethe chances of achieving a desired total return over thelong term. Asset allocation allows you to distribute your investmentsamong the different types of assets to varying degrees. Asolid asset allocation strategy balances riskier investments withsteadier investments, and balances short–term with long–terminvestments. For example, allocating some of your investmentsinto an emerging technology company (higher risk) while alsoinvesting some of your assets in government bonds (lower risk)balances riskier investments with steadier investments.

There are several benefits to the implementation of a soundasset allocation strategy:

1. Reduces volatility over time: Stocks, bonds and cash generally do not gain or lose value concurrently. Having all three in a portfolio can help reduce volatility over time by offsetting setbacks in one category through gains in another.
2. Helps protect against losses: The core of an asset allocation strategy is based on risk versus return. While some investors believe asset allocation is an investor’s way of settling for mediocrity, most financial experts will argue that asset allocation is a good protection against major losses, especially if one asset class suddenly takes a dive.
3. Works in bull and bear markets: Rather than "putting all of your eggs in one basket," using an allocation strategy that is designed so different investments respond to the market at different times will help improve the chances that your portfolio will be able to weather an economic downturn.
4. Can help increase returns and decrease risks: By understanding the risk/return characteristics of various asset classes, allocating the right asset can help decrease risks and increase returns. For example, a money market or government treasury generally offers lower risks and returns, while small cap equities will have higher risk but also the highest return potential.

Strategically dividing assets between stocks, bonds and cashis only half the battle. You also have to properly diversify withinasset classes. Within the equity portion of your portfolio, youhave to decide the right balance of investments in small, mediumor large companies. With bonds, you need to know whichbonds you want to invest in and how much to invest in each.Whether you select investment–grade municipal securities fortheir safety and tax–advantaged income stream, or corporatebonds because they often offer a higher yield (in exchange forgreater risk), proper diversification can help to eliminate dangerousconcentrations in any one particular security, sector or style.This helps you to avoid an investment strategy where you rely ontiming the market’s ups and downs – often a losing strategy.

Creating a Financial Assessment Routine

Here are some points which can help you better assess yourfinancial portfolio and strategy:

1. Conduct a financial review: Examine your current financial situation, including all of your assets and liabilities. Keep in mind that an investment, such as home ownership, may seem like a liability because of your mortgage payments, but the equity you’ve built can be counted as an asset.
2. Determine your risk tolerance: Dividing your assets into different investment sources involves some financial risk. Your risk tolerance depends on several factors including your goals, age, income and personality. You’ll want to work with your Financial Advisor to determine your risk tolerance.
3. Think about your future financial goals: By considering what you’d like your financial future to look like, you can devise a strategy to help you achieve those goals. Whether your focus is on retirement, travel, a second home or education for your children, your Financial Advisor can help you plan accordingly.

Securing Your Financial Future

Proper asset allocation and diversification are keys to a longand successful financial future. As with starting any new routine,get advice from an expert. Your Financial Advisor can helpyou develop a well–tailored investment strategy, select the rightinvestment vehicles that align with your financial goals, and togetheryou can develop the discipline and consistency needed tobuild and strengthen your financial portfolio.

Asset Allocation and Diversification do not assureprofit or protect against a loss in declining markets.

Michael O’Keeffe is Managing Director and head ofGlobal Private Client Investment Management andGuidance.

For more information, contact Merrill Lynch FinancialAdvisor Tiffany Mock of the San Antonio office at210.805.2848.