Asset allocation describes how your investments can be divided into stock,
bond and short-term cash categories. It is one often most important
investment decisions you can make. Because everyone is different and each
category has different historical return and risk characteristics, your asset
allocation should reflect your time horizon and risk tolerance.
Below are some sample allocations based on age. Generally, the longer your
time horizon, the greater the portion of your portfolio that should be
allocated to stocks.
Age
|
Stocks
|
Bonds
|
Cash
|
30's
|
65%
|
25%
|
10%
|
40's
|
60%
|
30%
|
10%
|
50's
|
50%
|
40%
|
10%
|
60's
|
30%
|
55%
|
15%
|
With this starting point, consider how you feel about risk. The greater your
risk tolerance, the more you should weight your portfolio toward stocks. If
you are uncomfortable with risk, allocate more funds to bonds and cash
investments.
Successful investing is an ongoing process
Using asset allocation as a guideline is not a one-time event.
Periodically, you should review your overall asset allocation objectives and
make sure your portfolio is still within your guidelines. If your situation
changes, your target allocation should change. Changes in your portfolio may
change your actual allocation. A portfolio that was 60% in stocks five years
ago may now have 75% allocated to stocks.
Reviewing your asset allocation annually is a good rule. Do not be
concerned if your current portfolio deviates slightly from your original
plan. Rebalancing generally makes sense if you are more than five percentage
points away from your objective.
When determining your asset allocation plan, be sure to include all your
current positions. This includes investment assets in retirement plans, IRAs,
bank accounts, mutual funds and investment accounts. Here is a worksheet that
can help.
| Asset |
Stocks |
Bonds |
Cash |
| Retirement Plan |
$ |
$ |
$ |
| IRAs |
$ |
$ |
$ |
| Investments |
$ |
$ |
$ |
| Bank Accounts |
$ |
$ |
$ |
| Mutual Funds |
$ |
$ |
$ |
| Totals |
$ |
$ |
$ |
| Allocation %'age |
% |
% |
% |
Compare the bottom line of the worksheet with your asset allocation
objectives and make changes as appropriate.
Using asset allocation as a starting point for making investment decisions
can be a valuable tool.
| This educational information is not meant as financial advice. Be
sure to consult your financial advisor to determine how the information
applies to your situation. |
