The Importance of Proper Asset Allocation

Proper asset allocation is the key to any investment portfolio. The goal of asset allocation is to balance your risk and reward, and often times differs based on your age and lifestyle.  I think the term asset allocation sounds a lot more complicated than it actually is. You essentially have three different types of investments; equities, fixed-income, and cash & equivalents. Equities are your basic stocks, fixed-income includes annuities and income producing bonds, and then you have your cold hard cash. The question still remains, what should your ownership allocation of each be?

For the beginner investor the best bet is usually a target date fund. I have a good portion of my 401k and IRA investments in target date funds currently. Most brokerages will have a series of these age targeted funds that hold a mixture of investments based on your target retirement date. For example, I currently have a Fidelity 2050 fund, meaning me goal retirement year is in 2050. The further out the year then the riskier the portfolio is to start, and as the years roll on the fund will reallocate itself to safer and more liquid assets. There are many critics out there that claim these types of funds ignore the uniqueness of each person, but the truth is that they are safest and low cost way for a novice investor to stash money for retirement. Say you want to increase your risk then you simply invest your money in a target date fund in a year that is further out than you actually plan to retire, and vice versa if you want to reduce your risk profile.

I gave you the three major types of investments, but let’s take a quick look at the individual investments within each of those categories. As I said before, equities are stocks and can include dividends, large-cap stocks (also known as blue chip), mid-cap, small-cap, and even emerging market stocks. While each of them carries their own individual risks, as a whole these are the riskier types of investments in your portfolio. Binary options are an investment derivative that fit within this category as well. What is binary options you may ask? They are an option that predicts the movement of a stock, up or down, and if you predict right then you stand to make some money. Next we have fixed income investments. These can include government or municipal bonds, and are often considered much safer in nature. Though there is still some risk involved, just think about all of the municipal bankruptcies after the economic meltdown.  Cash and cash equivalents are the safest ways to hold cash, but they are also prone to inflation. This could be a bank CD, a money market account, or even cash stuffed under your mattress!

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