Take a moment to compare the best and worst years of each portfolio. Notice that the portfolio of 100% stocks had a return of -38.01% in its worst single year. Investors close to retirement need to ask themselves if they are able to take on such an extreme amount of downside risk. The opposite is also true.  The portfolio of 100% cash had a return of 5.96% in its best year and its average annual total return was only 3.09% over the past 20 years.  Investors with a significant amount of time before retirement need to decide whether that type of portfolio provides the growth potential they need to achieve their retirement goals.

Here are a few sample asset allocation portfolios.

Past performance is no guarantee of future results.

Source: Zephyr StyleAdvisor. The time period is from 1/1/93 through 12/31/12.

You also want to diversify within each asset class.

Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. In general, when interest rates rise, bond values fall and investors may lose principal value. Some funds, including nondiversified funds and funds investing in foreign investments, high-yield bonds, small- and mid- cap stocks, and/or more volatile segments of the economy, entail additional risk and may not be appropriate for all investors. Consult a fund's prospectus for additional information on these and other risks.

Next: Diversify within each asset class – Stocks