HOW ASSET ALLOCATION PAYS.
Author | Day, Daniel M. |
It's important for your money to work as hard as possible for you. Simply saving for your goals is not enough. Dividing your money across different types of assets, known as asset allocation, reduces your risk and helps maximize return potential.
A rule of thumb is to have almost 90% of your portfolio's return determined by your asset allocation among stocks, bonds and cash. The goal is to develop a long-term investment strategy of diversified investments, built by analyzing your goals, time horizon and risk comfort level. To maximize your portfolio, try a few rules for smart asset allocation,
* FOCUS ON YOUR GOAL AND TIME HORIZON. Ask yourself: What are my investment goals given my age and current financial circumstances? When do I want to use the money? Am I saving for retirement or to purchase my first home in two years?
In general, the more time you have to invest, the more you should be considering an investment's Long-term growth potential, and the less concerned you should be with short-term ups and downs.
* DETERMINE YOUR COMFORT WITH RISK. Because every investment is subject to some type of risk, know your risk tolerance before investing. If you lose sleep when stock prices plunge or you panic and sell, consider less exposure to stocks. conversely, if you remain positive when stocks take a roller coaster ride, try increasing your exposure to stocks. Bonds tend to provide higher level of interest earnings, but their values change significantly when interest rates rise and fall. Historically, stocks have the greatest potential to outpace inflation, but they experience wider short term swings in price than...
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