Three methods that can help you achieve proper asset allocation

Having a strategy of mixed investments that includes different asset classes can help you spread the risk in your overall portfolio. Deciding on your asset allocation—how much of each asset you’ll invest in—is a personal decision that depends on many factors, including your goal, your ability to tolerate risk, your capacity to take on risk, and how much time you have to achieve your goal. We’ll share three methods you can use to find a suitable asset allocation.

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Asset class

Description

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.

Bonds

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).

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.

The aggressive investment mix strategy is 80% stocks and 20% bonds.
The moderate investment mix strategy is 20% cash, 40% stocks, and 40% bonds.
The conservative investment mix strategy is 20% stocks, 40% cash, and 40% bonds.