Asset allocation is a way to divvy up the types of investments you have -- some a very high-risk, others less so. It's all about having a balanced portfolio. Time is your best friend when it comes to investing. Typically, younger people (in their 20s and 30s) have time on their side, so their portfolios have more high-risk (and high-return) investments. The older you get, the lower risk you can take.
Types of assets (from highest to lowest risk) are:
* Stocks
* Bonds
* Money Markets
* CDs (Certificates of Deposit)
* Savings accounts
Picture a round plate with different types of pies. Your high-fat, high-sugar (but very very tasty) banana cream pies are your stocks. Your sugar-free, fat-free fruit pies are your bonds. Your sensible chicken pot pies are your money markets and CDs. The younger you are, the more banana cream pies you can have. The older you get, you lean more toward the sugar-free and chicken pot pies.
A younger person might have this type of asset allocation:
Suze Ormanwould even recommend against any bonds at all.
A person in or near retirement might have one that looks like this:
Vanguard has cookie-cutter funds it calls "Target Retirement" funds. The asset allocation becomes more conservative the closer you get to retirement. Here's a sampling of the asset allocations. The year indicates the investor's date of retirement:
Target Retirement 2035: 89.9% stock, 9.95% bonds, 0.15% short-term reserves*
Target Retirement 2025: 79.12% stocks, 20.82% bonds, 0.06% short-term reserves*
*(Money markets, bonds, savings accounts fall under "short-term reserves.")
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