Asset Allocation

Studies have shown that asset allocation is the single most important factor in determining returns from investments. What is meant by asset allocation? Asset allocation is all about not putting all your eggs in one basket. It provides some protection should things go wrong in one investment class or sector, as is likely to be the case from time to time. For example, many people loaded up on tech stocks in the later 90s. When the market corrected, many investors experienced steep losses. Depending on what your holdings are and how they are affected by market conditions, this could really hurt. Is it only stocks that we need to be concerned about? Even with bonds....the bond market has its up and down swings as interest rates change, though to a lesser degree typically than stocks. If you put your money into a money market account, while you shouldnt see any declines in value, the lower returns wont allow much reward. Arent people really concerned about the volatility associated with stock? The stock market is historically the best long term investment vehicle - one that can deliver an average return of perhaps 10% annually over the longer term - but in the short term, it is more volatile than other investments. What determines your asset allocation? Your risk tolerance and investment objectives are what should guide your decision making. Those with a shorter time frame until their money is going to be needed should use money markets, CDs and short term bonds. If you have a longer time frame (10-15 years) you would likely want more of your holdings in stock investments if you have a tolerance for volatility, and you could allocate 70% of your holdings to stock, with the remainder in bonds and money markets. If you are retiring in 25 years or more, you would likely want to ratchet up your stock portion to 80% or more. If you have a 15 year time frame, but your have less stomach for volatility, you may want to consider 50% in stock, with the remainder in bonds and money markets. How do you achieve your desired asset allocation? ·