Understanding Asset Allocation
What is asset allocation and why is it so important? Asset allocation is how you divide your money among the different types of investments, which helps you manage the ups and downs of the market in order to help manage risk. Attempting to invest in the hottest asset class of the moment may actually result in lower returns over the long run. This year's winner could easily be next year's loser. Here is a chart that illustrates how asset classes can move in and out of favor from year to year.
What is the ideal asset allocation mix?
When it comes to planning for retirement, diversification is a smart way to approach asset allocation for retirement. The three most common types of asset classes are stocks, bonds, and cash equivalents:
- Stocks are shares of ownership in a company.
- Bonds represent the borrowing of money by entities like corporations and governments.
- Cash Equivalents seek to maintain the value of your investments.
When should you revisit your asset allocation strategy?
While the asset allocation strategy you develop today may be ideal for you currently, it is important to remember that life changes (such as financial status, marriage, family additions, etc.) may also cause changes in your investment needs. Revisiting your asset allocation mix from time to time is a good practice to help keep your investment strategy in line with your retirement goals.