Introduction

Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as cash, bonds, stocks and property. Each asset class has different levels of return and risk, so each will behave differently over time. For instance, while one asset category increases in value, another may be decreasing or not increasing as much. Some critics see this balance as a settlement for mediocrity, but for most investors it’s the best protection against a major loss should things ever go amiss in one investment class or sub-class. The consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of stocks or bonds is secondary to the way you allocate your assets to high and low-risk stocks, to short and long-term bonds, and to cash on the sidelines.

Things to consider

– Risk Vs. Return: The risk-return trade off is at the core of what asset allocation is all about. It’s easy for everyone to say that they want the highest possible return, but simply choosing the assets with the highest “potential” isn’t the answer. The crashes of 1929, 1981, 1987, and the more recent declines of 2007-2009 are all examples of times when investing in only stocks with the highest potential return was not the most prudent plan of action.

– Determine Your Long- and Short-Term Goals: We all have our goals. Whether you aspire to own a yacht or holiday home, to pay for your child’s education or to simply save up for a new car, you should consider it in your asset allocation plan. All of these goals need to be considered when determining the right mix.

– Time Is Your Best Friend: The U.S. Department of Labor has said that for every 10 years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value of money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks.

Summary

With literally thousands of stocks, bonds and mutual funds to choose from, picking the right investments can confuse even the most seasoned investor. However, starting to build a portfolio with stock picking might be the wrong approach. Instead, you should start by deciding what mix of stocks, bonds and mutual funds you want to hold – this is referred to as your asset allocation. There is no one standardized solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you don’t have, don’t worry. It’s never too late to get started. It’s also never too late to give your existing portfolio a face-lift. Asset allocation is not a one-time event, it’s a life-long process of progression and fine-tuning.

Additional Information Resources

Additional information resources are available by clicking on the links below:

• Financial Planning
• Investments 
• Insurance 
• Pensions
• Tools & Calculators
• News

You can also view information related to your particular stage of life:

• Starting Out
• Growing Responsibility
• Nearing Retirement
• Retired