Definition: In simple terms- asset allocation is about choosing how much to invest in each asset class.
Asset class: Well, there are three major asset classes: stocks, bonds and cash. Moving beyond these common asset types, however, and you could invest in real estate, private equity, natural resources, foreign currencies, and more.
It doesn’t matter if your investment account is an IRA, 401(k) or 403(b), or a regular brokerage account, asset allocation works for any portfolio. You can select from among different stocks, bonds, mutual funds, exchange traded funds, Treasuries, and money market accounts. Your portfolio mixture is determined by your investment goals.
In investing, you never want to be overly invested in one asset class and avoid investing in assets of poor quality. The proper asset allocation is to provide the ideal mix of investments that gets you the greatest long term gains for a minimal amount of risk.
Determining your asset allocation: Consider the following factors: your age, years to retirement, goals, and risk tolerance of course. Rule of thumb- maximum stock market exposure tends to be riskier. Always have a balanced portfolio tailored to your goals, and needs. Younger investors can be aggressive and invest more into stocks (75% and up); since they have time to make back their losses if market tanks (like it did back in 2008/09). While older investors will primarily focus on capital preservation, then tend to invest less in stocks and more in bonds or cash, since they rely on their nest egg for annual income and can’t afford losses.
The objective of asset allocation is broad diversification and minimizing risks as much as possible. Diversification gives you the opportunity to make money with one asset class even while another declines.
If you have any questions on this matter, don’t hesitate to contact me.
Perfect depiction of asset allocation below (courtesy CNNMoney)