Understanding Your Entire Portfolio A Must

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OCEAN CITY – Many investors tend to focus on one investment account at a time. They review the performance of their 401(k), check their mutual funds’ returns, and then review their brokerage account. While this approach provides useful information, it doesn’t recognize that all investments are part of an integrated portfolio. And it doesn’t recognize that your investments are only part of your total financial picture.

For example, suppose your company has been doing well and you’ve invested a significant portion of your 401(k) in the company’s stock. In addition, you’ve exercised stock options and now hold a significant number of your company’s shares in your brokerage account. Plus, you’ve invested in a mutual fund that focuses on your employer’s industry, and the fund owns shares in your company.

This situation can be compounded if you invest in several mutual funds. You may think by choosing several funds with different investment objectives your portfolio will stay well diversified. That may not be the case, as funds with divergent goals may hold large positions in the same stock.

Considered separately, each account might be reasonably well diversified, so the positions in your employer’s stock might not seem to be a matter of concern. However, when you look at the combined holdings in all of your accounts, you begin to realize that you could have an unintended concentrated position in that one security.

It is easy to overlook a concentrated position when the stock’s price is increasing. But if that stock represents a significant portion of your investments, you’ll want to consider the potential impact of a falling stock price on your portfolio. If that risk concerns you, monitoring the stock and implementing diversification strategies can help protect against losses.

At Merrill Lynch, asset allocation is the fundamental tenet of long-term investing. It’s also part of the wealth management process, where you and your Financial Advisor establish your objectives, set a strategy, implement solutions and review your plan’s progress. Your Financial Advisor, using analysis such as "Allocating Your Assets," can help you determine if your portfolio is properly diversified — as proper diversification is a key step in setting an appropriate strategy. Of course, asset allocation and diversification cannot assure a profit or protect against a loss in a declining market.

"Allocating Your Assets" looks at historical trends of return and risk of various asset classes. It categorizes your equity investments by such factors as size, style and industry sector and your fixed-income investments by maturity.

Capabilities like "Allocating Your Assets" give you and your Financial Advisor an analytical overview of your current portfolio’s allocation compared with an allocation that matches that of your Investor Profile. (Each of the five Merrill Lynch Investor Profiles — Capital Preservation, Income, Income/Growth, Growth and Aggressive Growth — has an associated asset allocation model, risk level and return potential.)

"Allocating Your Assets" can also highlight a concentrated position that may be part of your individual holdings, including concentrations that may arise from the securities held in your mutual funds. Doing so can help determine whether you may face risk from over-exposure to a single stock.

For more information on asset allocation and diversification strategies, contact a Merrill Lynch Financial Advisor.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

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