What’s asset allocation?
Asset allocation describes how you’ve mixed up your investments among the three major asset classes—cash, bonds, and stocks. Each class offers a different level of risk and reward and behaves differently over time. Holding a mix of asset classes can help balance your potential long-term returns with a level of risk that you’re comfortable taking.
Cash and cash equivalents
Investments earning low interest that you can pretty easily turn into cash, including money market, stable value, and some fixed-income funds. These types of investments are considered a safe asset class, as they tend not to go down in value and are generally designed to provide a degree of stability to your portfolio.
When you buy a bond, you’re actually lending your money to a government or a business. In return for your loan, you generally earn interest during the life of the bond, referred to as the bond’s yield or income. If you hold the bond to maturity (which means the day the loan is due), you’ll generally receive your original investment (known as the principal) paid back and some yield. There are, however, no guarantees. In terms of risk, bonds tend to be riskier than cash (although not as risky as stocks), but they also offer a potential for higher returns (also not as high as stocks).
When you buy shares of stock, you buy a piece of ownership in a publicly traded company. Stock prices are determined by the amount sellers are willing to accept and how much buyers are willing to pay on the stock market. As a general rule, stocks are more volatile than bonds and cash investments—meaning that they can change value frequently. In addition to stocks of a single company, there are stock funds, which are a professionally managed combination of stocks. Stocks have usually offered the highest returns over the long term—but they’re also the riskiest asset class.
What are common asset allocation ratios?
How you choose to allocate the assets in your retirement account depends on your:
• Risk tolerance—Means how much risk you’re comfortable taking. Some people feel comfortable taking risks, while others don’t.
• Risk capacity—Refers to your personal finances and how much financial risk you can afford to take.
• Time horizon—Means how much time you have to achieve your goal. The more time you have, the more risk you may be able to accept in your investments.
While the actual allocation to each asset will be personal to you, generally, an aggressive investment mix is mostly stocks and some bonds, a more moderate mix balances stocks and bonds and adds in some cash, and a conservative mix is mostly cash and bonds with only some stocks.
See the differences between investment strategies
Three ways to find a suitable asset allocation strategy for you
Now that you understand the concept of diversification and differences among the asset classes, we’ll share three methods you can consider to find a suitable asset allocation for your portfolio.
1 Managing your own investments
If you want to select and manage your own investments, you’ll need to do your own research, choose your own diversified mix of investments, and monitor their performance. Additionally, you’re responsible for adjusting your asset allocation over time to help you reach your retirement savings goals. Generally, your asset allocation should become less risky as you get closer to your retirement date.
2 Using target-date funds
Asset allocation is important to get right in retirement planning, but it may also be a complicated matter for many people. A target-date fund (TDF) is a single fund you can consider choosing to help you address that challenge.
TDFs are professionally managed investments designed to reduce risk as your chosen retirement date approaches. These funds are designed to make investing for retirement more convenient by automatically changing your investment mix or asset allocation over time. Funds with target dates in the more distant future tend to be invested in more aggressively, with a greater allocation to stocks. The asset mix then gradually glides to become more conservative, with greater allocation to bonds and cash as your target year approaches.
3 Getting help from a financial professional
You can get help from a financial professional or take advantage of a managed account if one is offered by your retirement plan. Both can identify appropriate investments based on the information you share and can manage your investments and asset allocation accordingly. It’s your responsibility to communicate changes to your financial situation or retirement goals, but the financial professional or managed account then generally does the work for you.
The importance of proper asset allocation
It’s important to identify a suitable asset allocation for your retirement account, keeping in mind that what’s suitable for you will likely change over time. Having a diverse portfolio containing a variety of investments from all asset classes may help limit your exposure to any single asset or risk while also helping you reach your financial goals.
For complete information about a particular investment option, please read the fund prospectus. You should carefully consider the objectives, risks, charges and expenses before investing. The prospectus contains this and other important information about the investment option and investment company. Please read the prospectus carefully before you invest or send money. Prospectus may only be available in English.
Past performance does not guarantee future results.
It is your responsibility to select and monitor your investment options to meet your retirement objectives. You should review your investment strategy at least annually. You may also want to consult your own independent investment or tax advisor or legal counsel.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.