Asset Allocation -- Why Is It Important To You?

“Asset Allocation” is a term that defines the way you divide your assets between rnvarious asset classes such as stocks, bonds and cash. Why is this important? Well, academics have studied the effects of various asset allocations on your total return and have concluded that over 90% of the return you earn on your investments is determined by your asset allocation.
Let me give you an example. If you earned 10% on your investments in any given year, over 90% of that 10% (9%) came from how much you had invested in stocks, how much in bonds and how much in cash. Not how much in this fund or that fund, or how much in this stock vs that stock, but rather how much you had in the asset class itself.
What is the appropriate asset allocation for you? Well, that depends. How many years do you think you’ll be invested? How much risk are you willing to take? How much growth do you need on your investments in order to achieve your goals? How much of your money should be invested overseas? How much in large companies? How much in small companies? How much in real estate?
If you are 30 years old today, and will work until at least age 65, you have 35 years for your money to grow before you need to start taking money out. In this example you can afford to take on more risk with a 35 year time horizon than a 55 year old with a 10 year time horizon. Of course, in both cases, the majority of your money will be invested past age 65 (since you don’t take out all your money at retirement) so your time horizon is really longer than that stated.
It’s important that you work with an investment advisor (preferably a Certified Financial Planner® professional) who can help you make the best possible asset allocation decision based on your individual circumstances. It’s not a decision that should be made lightly as it will impact your performance year in and year out. It can mean the difference between reaching your financial goals............or not!