When stock prices start to rise, bonds usually start going the other direction, and vice versa. The problem with a “balanced” asset allocation is that the values of stocks and bonds often don’t move together-in fact it’s usually the opposite. Market chaos, inflation, your future-work with a pro to navigate this stuff. This is the “yin and yang” approach to asset allocation, where half of your investments are in stocks and the other half is in bonds and cash. Is this type of approach going to cut it? Nope! The returns you’ll get from bonds and cash investments simply aren’t enough to keep up with inflation, which cuts into your purchasing power by 2–3% each year. One example of a “moderate” approach is to have around one-third of your investments in stocks and the rest in bonds and cash. This is for folks who have a slightly higher tolerance for risk, but the idea of the stock market going up and down still makes them feel queasy. 1, 2 Don’t settle for wimpy returns from bonds and cash investments-you can do much better! The average annual returns for bonds hover around 5%, and cash investments-think certificates of deposit (CDs) and money market accounts-average less than a 1% rate of return. This is not a winning approach for saving for retirement. Most of your investments in a conservative form of asset allocation will be in bonds and cash, while only a small percentage will be used to buy stocks. They wouldn’t go skydiving with you if you paid them to. This approach is designed for investors who are afraid of the stock market and want to minimize their risk. The idea behind asset allocation is to balance risk and reward by dividing up your portfolio’s assets based on your financial goals, how much risk you’re comfortable taking on, and the total amount of time you expect to hold onto your portfolio.īased on those factors, there are basically four different types of asset allocation you need to know about: What are some different types of asset allocation? If you want to reach your retirement goals, you need to get your asset allocation right. Why? Because your asset allocation-the way your investment portfolio is split up-will play a huge role in determining what kind of returns you should expect from your investments over the long haul. We’ll get to that in a minute.ĭeciding where to send your money is one of the most important investment decisions that you’ll make. Makes sense, right? The trick is getting your asset allocation right. That means your asset allocation is 80% stocks, 15% bonds and 5% cash. Don’t worry, it’s not as complicated as it sounds! We're going to break it down for you in plain English so that you know what it is and what it means for your investment strategy.Īsset allocation is just a fancy term for describing the way your investments are divided in your portfolio between different types of “assets,” like stocks, bonds and cash.įor example, stocks-like growth stock mutual funds-might make up 80% of your retirement portfolio while you also have 15% in bonds and the remaining 5% in cash investments. There’s a fancy term for that in investing circles: asset allocation. Having a “set it and forget it” attitude isn’t going to cut it, people! When it comes to taking the right steps to building wealth and planning for your future, deciding how you’re going to spread out your investments is right there at the top of the list. you know what I’m talking about! These are decisions that are going to have an impact on the rest of your life.īut sometimes we don’t put as much thought into another big decision: how to invest our hard-earned money for retirement. Where to go to college, who you’re going to marry, what house to buy. There are times in life when you have to make some big decisions.
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