Best practices for asset allocation
Practicing asset allocation is the single most important thing an investor can do. Here's how to get started.
1. Time is on your side.
Those with more years until retirement can afford to put a greater percentage of their assets in the stock market.
2. Stocks mean risk and return.
Those with a higher tolerance for volatility should put more money in the stock market than those in the same age group who have a lower tolerance.
3. College savings funds need stocks.
Since college costs are rising faster than inflation, no other investment will keep pace as well as stocks. Invest more in stocks when your kids are young, and as they get older move more money into bonds.
4. Get professional advice.
One of the best ways to develop an effective asset allocation plan is to consult a qualified financial planner.
5. Allocation is the key to achieving your goals.
Studies have shown that asset allocation is the single most important factor in determining returns from investing.
6. Know your stock funds.
Before you set up your asset allocation plan, you must find out the nature of the companies purchased by the mutual funds you own. It's not enough to go by the names of the funds themselves, either. In search of performance, far too many fund managers buy stocks that barely fit their portfolio's explicit investing parameters. So your "income" fund may, in practice, contain many stocks that should be considered "growth," or vice versa.
7. Know your bond funds.
Similarly, you must learn the same about the bond funds you own.
8. Don't rely on software alone to build a savings plan.
Software programs might not go far enough to devise your asset-allocation plan.
9. Determine your long-term goals.
Do you want to buy a sailboat after you retire? Or pay off your mortgage so you can write a novel? Figure out what your long-term goals are, and what they will cost.
10. Get started.
It's never too late to get started, and it's never too late to revamp or revise an asset-allocation plan.