How to Allocate a Nest Egg

Taking care of your nest egg becomes easier with a diversified portfolio.

It is never easy to pick a strategy for retirement planning and sticking with it. Anxiety rules when you think about whether any given investment will pan out in the future. One way to alleviate some of that stress is by allocating your nest egg into a diverse set of investments. Asset allocation is a smart money move because it helps to weather market lows in one class of investment, since another investment in your portfolio will likely be going up.

Instructions

1. Decide on a timeline. Much depends on how long you plan on saving without withdrawing money. Your timeline helps to divide your investments into long and short term. Having room to put money in long-term investments will typically yield more return. One rule of thumb is to subtract your age from 120; for example, if you are 40 years old, then 80 percent should be allocated to long-term stock investments. If you have $10,000 to start with, $8,000 should be put into stocks, while the other $2,000 can be put into shorter-term, lower-risk options like CDs or mutual funds.

2. Assess your risk tolerance. Even though the point in diversifying your nest-egg allocation is to protect you from market lows, decide if you can bear losing a certain amount of money within the year and reap benefits from the high-risk level, as the return may increase in subsequent years. Every portfolio should have some high- as well as low-risk investments. If the majority of your portfolio is low risk, you may not reach your goal by your timeline. On the other hand, if you primarily carry high-risk investments, you can potentially lose your entire nest egg. As you get closer to your retirement goal, your high-risk investments will have a lower percentage of your funds allocated to it if you use the 120-minus-your-age equation.

3. Review your portfolio on a regular basis, typically between six months to a year. Checking sooner than that can result in anxiety if a particular asset is not doing well. If you allow your investments to perform, then you can better assess if they are performing in line with your goals. Remember to reassess your timeline and goals along with your portfolio. Make changes as necessary.

References

• The American Association of Individual Investors: Asset Allocation and Retirement -- Do You Need to Make a Change?
• The Motley Fool: Asset Allocation for Retirement
• Forbes: Asset Allocation -- The Key to Building a Big Nest Egg