The beginning of a new year is a time for review, reflection and resolutions. When it comes to your money it’s the perfect time to set goals, make changes and resolve to stick to those changes long term. Whether it’s setting up and funding an IRA or just putting extra money aside for a rainy day, whatever the goal, how your money is invested, its asset allocation, and consistent rebalancing will be some of the most important decisions you’ll make as an investor.
What Is Asset Allocation?
Asset allocation is an investment strategy based on finding a balance for your money between different assets that fits your goals and risk level. These assets are broken down into three main classes – equities (stocks), fixed income (bonds) and cash – which will make up your investment portfolio.
Unfortunately, there is no simple formula for figuring out your perfect asset allocation. But there are some rules of thumb to follow. The most important decision will be the split between risky and non-risky assets or your stock/bond split. A conservative rule is to have “your age in bonds”. According to this rule, if you are 40 years old, 40% of your portfolio would be in bonds. For those who prefer more risk (age – 10) adjustments can be made. It offers a starting point. Once you have an asset allocation that you’re comfortable with, it’s time to make sure you stick to it.