Introduction to Asset Allocation Allocation

Introduction to Asset Allocation Allocation
Asset allocation is a snappy phrase that simply means dividing your investments among several different categories in an attempt to protect your portfolio from wild swings in any one section.

Some experts believe that asset allocation is the single most important factor in investment success.

Generally, you will want to consider a mix of stocks, bonds, and cash. The percentage you select for each investment category is the process of asset allocation.

For example, you may decide that your particular situation calls for a mix of 80 percent stocks, 15 percent bonds, and 5 percent cash. You might further break it down this way:

Stocks 80%
Income 20%
Growth 40%
Foreign 10%
Small-Cap 10%
Total: 80%

Bonds 15%
Long-Term 10%
Mid-Term 5%
Total: 15%

Cash 5%
Short-Term Bond Fund 5%
Total: 5%

These are hypothetical numbers for a hypothetical investor. You should base your particular allocation on a number of factors, including:

• Risk tolerance
• Years to retirement
• Your income
• Your savings

Splitting your assets among different investment categories helps you weather the ups and downs that are part of the investing cycle. For example, bonds and cash may add balance to your portfolio.

Investors often use the terms “diversification” and “asset allocation” interchangeably; however, asset allocation is a much more thoughtful process. Diversification means not investing solely in any one investment category. Asset allocation takes that one step further and assigns specific percentages to each category.

A general guideline is that younger investors can afford to be more aggressive because they have more time to ride out short-term drops in the market cycle. Older investors may be more comfortable with a conservative plan, particularly as they get closer to retirement. The more time you have, the better chance you have to reach your goals.

Things to Remember:

• Asset allocation is the process of splitting your investments among stocks, bonds, and cash.
• A properly balanced portfolio can help protect you from severe market fluctuations.
• Risk tolerance plays a big role in portfolio selection.

Things to Do

• Look at your portfolio at least once a quarter for proper balance – more frequently in turbulent markets.
• Examine your current holdings and figure out the percentage you have invested in each category: stocks, bonds, and cash, and ask yourself if you are comfortable with that mix.