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There isn’t a magic formula for managing your portfolio, but there are a few guidelines that can help point you in the right direction. To figure out where to put your investment funds, you first should determine how comfortable you are with risk and pinpoint the time frame in which you’ll need to access the money. Based on the answers to those questions, you can find an asset allocation that fits your needs.

Risk Tolerance and Time Horizon

Your risk tolerance level plays a big part in the management of your portfolio. If you’re the type of person who anxiously watches every fluctuation in the market and worries about losing his nest egg, you probably should stay away from the more aggressive investments. But if you thrive on taking chances in pursuit of a big gain, the more conservative vehicles won’t do much for you. Figuring out where you fall in this spectrum is an important place to start.

The next factor to address is whether the funds will be needed sooner or later. The later you need them, the more aggressive you can afford to be, because they’ll have time to recover from any downturn in the market.

Conservative Allocation

If you discover that you’d rather sit on your nest egg than risk it in search of a big win, or if you’ll need the funds within the next few years for a down payment on a house or for college tuition, you’ll want to err on the side of caution and go with a more conservative approach. For example, if you’re merely seeking to hold on to your money, the most conservative allocation would be 100 percent investment in FDIC-insured vehicles, such as savings accounts or CDs.

If you’re in retirement and would like to make sure most of your money is secure but you need a measure of growth or income, a mix of 25 percent to 40 percent cash (CDs or money market funds), 35 percent to 40 percent fixed-income vehicles (typically, bonds issued by the government or major corporations) and 20 percent to 40 percent stocks would be recommended.

Moderate Allocation

If you’d like to put your money to work for you but aren’t comfortable with a lot of risk, a moderate asset allocation might be right for you. Provided you have a fairly long time horizon for investment, a mix of 60 percent stocks, 25 percent fixed-income vehicles and 15 percent cash would give you some potential for growth while keeping a large percentage of your money in stable investments.

Aggressive Allocation

If you’re a risk taker in search of a big return or are a young investor starting a retirement fund, a more aggressive approach might be appropriate. Obviously, the most aggressive allocation is 100 percent investment in the stock market, but if that’s too much exposure to risk, other options include a mix of 80 percent to 90 percent stocks, 5 percent to 15 percent bonds or other fixed-income vehicles and 5 percent cash.

Target-Date Funds

If you’re starting a college fund for a small child or retirement is many years away, target-date, or life-cycle, funds are an option. These mutual funds take your goals, time horizon and risk tolerance into consideration and apply a standardized allocation. For example, Fidelity Freedom Funds are targeted for specific years, and the portfolio mix is determined by how far away that target date is. The funds get more conservative as the target date approaches.

This is a simplified approach that doesn’t require you to readjust your investments as your time horizon shortens, but critics of this type of allocation maintain that such a standardized method is inappropriate because each investor has a unique set of circumstances.

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