Asset AllocationThe way you divide the money in your retirement plan among different types of investments called asset allocation can have a significant effect on your long-term investment returns. In choosing the investment mix for your retirement plan, there are three important considerations you should keep in mind: time frame, risk tolerance, and your personal investments.
Time Frame When You Plan to Use the MoneyYour time horizon is an important key to determining how best to invest your money. If you're retiring in five years or less, you may want to concentrate a larger portion of your portfolio in bonds and cash. If it's longer until retirement, you may want to emphasize stocks since stocks have historically provided more growth over time than either bonds or cash.
In addition to considering the length of time until you retire, you should also consider the number of years you will be living in retirement. You'll probably spend many years in retirement, perhaps 20 or 30 years. While in retirement, your investment focus may be income generation, but you don't want to invest too conservatively and prohibit growth.
Risk Tolerance Your Comfort With RiskSince all investments involve some degree of risk, consider how willing you are to accept fluctuations in the value of your investments. Remember, risk and return generally go hand in hand.
Lower risk investments (such as money market funds) tend to experience less fluctuation, but offer very limited growth opportunity long-term. Stocks and stock funds offer higher return potential in exchange for a greater degree of risk.
Your Other Personal InvestmentsWhen choosing investments it's important to consider all of your assets, even those outside your retirement plan, so you can design a comprehensive plan tailored specifically to your financial situation.
It is also important to review your investments. Your goals and needs may change over time. Therefore, you may want to review your asset allocation once a year to make sure that it is still suited to your needs.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.