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.
Investing involves risks, including the potential loss of principal. These products carry many individual risks, including some that are unique to each fund. Please see each fund’s prospectus or offering memorandum/trust document to learn all the risks associated with each investment.
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
For illustrative purposes only.
For illustrative purposes only.
For illustrative purposes only. As market conditions change, so may the risk/reward potential of these investment types. Neither asset allocation nor diversification guarantees a profit or protects against a loss. There is no guarantee that any investment strategy will achieve its objectives.
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.