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Asset allocation reduces volatility

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  • Bonds, too, have specialized areas. They are characterized according to risk, issuer, maturity or geographic origin. These subcategories include investment grade, junk (high yield), government, mortgage-backed, corporate, short-term, intermediate, long-term, domestic, foreign and emerging markets bonds. Generally, bonds offer higher returns than cash equivalents, but carry more risk.
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  • Cash is considered the safest form of investment, but offers the lowest return. Cash-equivalent investments are Treasury bills, money market funds, money market accounts, savings accounts, certificates of deposit, etc.

  • Real estate, as in real property, has its own market cycles and often performs in direct opposition to the stock market.


  • REITs are publicly traded stocks of companies that own and manage multiple income properties on behalf of their investors. They are traded like stocks, but are composed of real estate holdings, so they rise and fall in tandem with the real estate market.
  • The sophisticated may invest in more esoteric assets such as natural resources (timber, oil), precious metals (gold and silver) or luxury collectables (art, fine wine, coins, automobiles), but these often require special knowledge or expertise. We'll focus on mainstream asset categories.

    Goals, time, risk tolerance
    When deciding how to allocate your money, you should know your retirement goals, time horizon, how much you can annually save toward your goal and how much risk you are willing to assume. Risk tolerance is all about your ability and willingness to lose all or some of your initial investment in the expectation of a higher return.

    Walt Woerheide, a certified financial planner and a professor of investments at the American College, says risk tolerance depends on the individual, but education can make a big difference. "People can tolerate risk better when they understand the nature of risk," he says. "For example, people who understand how a parachute opens and the mechanics are more willing to go sky diving than someone for whom it is kind of a mystery about how the chute will open up."

    For that reason, it's a good idea to avail yourself of any educational opportunities your company may provide -- seminars, teleconferences, informative Web sites -- that can help you bone up on asset allocation.

    Asset allocation
    For a quick lesson, check out the asset allocation chart that corresponds to your age category to see how you can diversify your retirement funds. Designed by the Vanguard Group, these charts show a shift from a more aggressive stance at a young age to a more conservative one for folks nearing retirement.
    View the chart
     

    All portfolios, however, should reflect the basic tenet for savers to "invest and stay well diversified," says Ellen Rinaldi, Vanguard's director of investment counseling and research.

    Common mistakes
    Not managing asset allocation wisely can cause you to delay retirement or reduce the amount you'll have to live on once you quit working. The most common mistake is being too conservative and not putting enough in stocks when you're young. "If you're overly conservative, you don't get the growth that you need," Charney says.

     
     
    Next: "Taking on too much risk can also cause problems"
    Page | 1 | 2 | 3 | 4 |
     
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