Asset allocation

• Your ideal asset allocation is the mix of investments, from most aggressive to safest, that will earn the total return over time that you need.
• The mix includes stocks, bonds, and cash or money market securities.
• The percentage of your portfolio you devote to each depends on your time frame and your tolerance for risk.
• This isn’t a one-time decision. Revisit your choices from time to time to see if it is still meeting your needs and goals.

Maximizing Return and Risk

The goal of allocating your assets is to minimize risk while meeting the level of return you expect. To achieve that goal, you need to know the risk-return characteristics of the various asset classes. The figure below compares the risk and potential return of some of them:

This is the risk-return tradeoff. High-risk choices are better suited to investors who have higher risk tolerance. That is, they can accept wide swings in market prices. A younger investor with a long-term investment account can expect to recover in time. A couple nearing or in retirement may not want to jeopardize their accumulated wealth.

The rule of thumb is that an investor should gradually reduce risk exposure over the years in order to reach retirement with a reasonable amount of money stashed in safe…