How to Allocate Your Investment Account

Adjust your asset allocation as retirement nears.

The concept of asset allocation is easy to understand, but it can be difficult to implement and put into practice. Asset allocation simply means that you put some money into stocks, some into bonds and some into guaranteed investments. Determining your ideal asset allocation is an important first step when building an investment portfolio. Every individual investor is different, and that means that everyone will have a different ideal asset allocation.

Instructions

1. Divide your financial goals into short-term and long-term categories. In the investment world, short-term is generally defined as five years or less. If you expect to need the money within the next five years, you have short-term money, and you cannot afford to take any risk with it.

2. Choose safe and guaranteed investments for your short-term goals. Those investments include money market funds, savings accounts and certificates of deposit. Look for the highest yielding investments you can find, but do not sacrifice safety to get a higher yield.

3. Assess your tolerance for risk and use that as the basis for asset allocation in your long-term portfolio. If you are comfortable with the day-to-day gyrations of the stock market and able to see beyond them to the long-term benefits, a portfolio that skews more toward stocks can be a smart move. If a large correction in the stock market would unnerve you and cause you to sell out at the bottom, focusing more on bonds and safer investments would be a better strategy.

4. Make a list of your long-term goals and determine how you want to allocate those investments. The longer-term your goals the more you can afford to invest in stocks, assuming your tolerance for risk allows that allocation.

5. Determine how much you want to allocate to tax-deferred accounts, and how much you want to put in personal accounts. Concentrating on tax-deferred investments like 401k plans and IRA accounts can lower your taxable income and your tax bill, but you cannot get at that money until age 59 1/2 without penalty. Personal accounts are taxable, but you can access them any time you want.

References

• Securities and Exchange Commission: Beginner's Guide to Asset Allocation