ASSET ALLOCATION TIPS
Asset allocation is a strategy for balancing your savings among stocks, bonds and cash investments. It's one of the most important decisions you can make after choosing how much to save.
Stocks, Bonds and Cash Vary in Risk and Reward Potential
Investments fall into three basic groups or asset classes: stocks, bonds and cash/stable value. More aggressive investments — those with a higher risk of loss — also tend to promise higher gains. The reverse also is true: Investments with lower risk have less potential for investment gains.
- Stocks are shares of ownership in a company. Stocks carry greater risks than bonds and cash/stable value options. Throughout history, stocks have offered the greatest potential for long-term growth.
- Bonds are debt securities that pay the holder the original amount invested plus interest on a future date. Bonds offer moderate risk and lower returns than stocks.
- Cash/stable value options are like bonds but hold money for a shorter time. They offer low investment risk and lower returns.
Asset Allocation Helps Smooth Ups and Downs
Spreading your savings among asset classes helps reduce the ups and downs in your account. Asset classes perform differently at different times. If you save money in different asset classes, you may find that the highs in one class balance out the lows of another, smoothing bumps in your account balance. Of course, there are no guarantees in investing, but asset allocation is a sound principle for building and protecting your retirement savings.
Your Choices May Depend on Your Comfort with Risk
The key to creating your own asset allocation is how much risk you're willing to accept in return for greater potential gains. You may want to balance these two factors:
- How much money you want to save for retirement. Your asset allocation should allow your account to grow at a rate that will meet your long-term goal.
- How comfortable you are with risk. How do you react to large ups and downs in the market? How much time do you have before you retire? And how long do you need your savings to last?