So you decided to start investing! That’s a good thing, as investing provides you the opportunity to earn more on your money and “make your money work for you”. But first, you’re going to have to do a little work for yourself and figure out where to start. This brief intro to asset allocation should serve as a good first step to help get the ball rolling.
So, asset allocation, what is it? Simply put, this is the broadest definition of diversity inside your portfolio. Your overall investment strategy will center on what type of risk versus reward balance you want to achieve, and asset allocation will help to provide that. These assets are made up of equities (stocks, ETFs, mutual funds, etc.), fixed income investments (bonds), and cash/cash equivalents.
The balance between these three asset classes will provide your risk level as stated above. For example, you may see a portfolio option for a 70/30 split, meaning your investments are made up of 70% equities and 30% bonds. The appropriate blend for you will depend on several factors: age, time horizon for investing (as in when you want to start withdrawing it), reason for investing, and your personal risk tolerance. A general rule of thumb is to have a less risky portfolio if you have a short time frame for when you’ll need the money. This is because you will not have the time to recoup losses, or take advantage of market growth, depending on which end of a stock market cycle we are in.
Here, look at this picture….
There are many ways to achieve asset allocation within your accounts, and much deeper ways to seek diversity among your investments by mixing up industries, investment vehicles, and account types. There are some very simple ways to obtain asset allocation, such as investing in target date funds (sometimes called lifecycle funds), or by using a diversified ETF or mutual fund. With any of these, you may have just one fund you pump your dollars into, but the underlying investments within that fund provide the asset allocation you’re looking for.
For those of us who prefer visuals, another picture….
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