Allocating Assets
“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 terribly complex about the strategy of asset allocation. It comes down to allocating your assets across different categories.
Balancing your investment among different asset classes will help you achieve your financial goals as well as help you reduce risk. To get started, 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 tolerance 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 to maintain 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.