|1.||Know what you're investing for.|
|2.||Make paying yourself a priority.|
|3.||Make tax-smart investments.|
|4.||Diversify your portfolio.|
|>||Understanding the various asset classes|
|>||Establishing the right asset allocation mix makes all the difference|
|>||Diversify within each asset class Stocks|
|>||Diversify within each asset class Bonds|
|>||Take the long view|
The next step along the road to diversification is to figure
out what mix of stock, bond, and cash investments is right
for you. This is called asset allocation. Remember, first you
need to know what you're investing for and how long you
have to invest. Based on this knowledge, take a look at the
sample mutual fund portfolios below and see
if you can find one that's right for you.
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.Select which target asset allocation portfolio best meets your time horizon and level of comfort with risk. If you're risk adverse, you may want to move down a portfolio. If you're comfortable with risk, consider moving up a portfolio.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses.
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.