Asset allocation refers to the act of investing money to get results in low risk settings. While investing your hard-earned money, you must look at investments with returns that align to your long-term financial goals. A strategic approach to asset allocation seeks to strengthen your portfolio while lowering your risk. You may get a better credit score. You work toward your savings goals. And you start investing towards a comfortable retirement.
To effectively manage your portfolio returns, it is wise to understand and follow simple allocation rules.
The Rule of Thumb
The rule of thumb, helps determine what percentage of investment funds will be allocated to stocks vs. bonds or other conservative assets. Traditionally, the ‘100-you age’ rule of thumb suggest you to take your age, subtract it from 100 and put that percentage of investment money into stocks. For example, at 25, you will invest 75 percent in stocks, which reduces to 40 percent at 60 years, lowering the risk level of your investments as you age.
The rule can be modified according to risk tolerance. For example, if you are a more aggressive investor, you might apply ‘125-your age’ as the rule of thumb in determining your asset allocations. Regardless of how you configure the rule, it is effective in recommending a sliding investment scale as you age. It also works best for individuals with a stable income.
This simple rule is a useful tool, but it should not be the only thing that guides your decision making. For example, when interest rates rise, it makes sense to shift allocation away from bonds and increase your investment in stocks to maximize returns. Working with a trusted financial adviser will help you make appropriate adjustments.
Asset Allocation for Millennials
As a young investor, it is important to consider your life goals as you structure your investment strategy. While traditional investors planned for large purchases like a house or a car, more and more young people are drifting away from the dream of home ownership and utilizing public transportation rather than buying a car.
If you have no big short-term purchases planned, and 20+ years of investment ahead of you before retirement, it may make sense to invest more aggressively. Consider allocating close to 100% to stocks and don’t rule out international investment. You might also consider Index Funds, which are a collection of bonds and stocks set to imitate a section of the financial market. Index stocks come with a low fees and potential returns in the long-term.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All indices are unmanaged and may not be invested into directly. Asset allocation does not ensure a profit or protect against a loss.Investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. An index fund is a mutual fund whose portfolio aims to match the risk and return of a market index. The goal is not to out-perform the index, but to mirror its activity. Index funds are subject to index tracking errors, and fund returns may not match the return of the underlying index. No strategy assures success or protects against loss.