What Is Asset Allocation?
"If you can accurately predict the future, you don't
need asset allocation. But for the rest of us mortals, how
we divide our money is a fundamental part of what makes
a portfolio sink or swim."
- Lorayne Fiorillo, author of
Financial Fitness in 45 Days
There's nothing all that complex about the strategy of asset
allocation. It's simply allocating your assets into different
categories.
Balancing your investment across different asset classes
will help you achieve your financial goals. To get started,
you need to ask yourself 3 questions:
- What are my financial goals?
- What is my investment time frame?
- What is my tolerance level for market risk?
The answers to these 3 questions will help you determine
where your invested money should be allocated. A larger portion
of your portfolio should be dedicated to:
Stocks, if…
- You haven't started a disciplined savings and investment
program and have a lot of ground to cover to reach your
goals.
- You have a relatively long investment time frame--such
as 5 to 10 years or more.
- You have the stomach for large-scale market volatility.
Bonds, if…
- You've made some headway on your financial goals and realize
you need to diversify your holdings to preserve your investment
as well as continue growth.
- You have a mid-to-long term investment time frame.
- You can withstand mild income fluctuation on the way to
achieving your goals.
Cash, if…
- You just want to preserve the money you already have.
- You may need to access your money at any time.
- The thought of losing any of your money makes you queasy.
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