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Asset allocation can mean the difference between a good portfolio and a great one


Managing your IRABack when technology stocks were making triple-digit gains it took a lot of self-control to keep from selling those staid old blue chips in your portfolio and turning them into hot tech shares. If you held on to the boring blue chips it might have kept your portfolio from tanking when the technology sector took a nose-dive and the Nasdaq dropped by triple-digits.

That's why asset allocation can be the deciding factor between a good portfolio and a great one. Ups and downs in the stock market are a given, but the right mix of stocks, bonds, cash and, possibly, alternative investments such as real estate, futures and commodities can help you ride out the bad times with less damage to your portfolio.

More than 15 years to go
If you have more than 15 years to go before tapping your IRA, you should load up on stocks. Leila Heckman, managing director of the Global Asset Fund at Salomon Smith Barney in New York says young investors could even go 75 percent stocks, 25 percent bonds and no cash.

"They could split the stock portion between value and growth, large and small cap -- have some international and a little emerging markets."

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If keeping that much money tied up in stocks will make it hard for you to sleep at night, Heckman suggests a 60 percent to 40 percent stocks-to-bonds allocation, with more blue chips and fewer tech stocks. For the bond portion of the portfolio, Heckman favors a high percentage of government bonds with an intermediate time frame.

Liquidity, return, investment time frame, risk tolerance and inflation are factors that need to be considered when determining the right asset mix. Heckman says investors should expect about 10 percent or 11 percent average annual return on stocks and 5 percent to 6 percent for bonds, depending on inflation.

"Asset allocation requires a certain discipline and objectiveness -- lay out a plan. People often have trouble doing that," says Heckman.

Education is important
Heckman also advises people to get some professional help. That doesn't mean shelling out for a money manager, but at least go to a seminar or take an adult education course in investing or retirement planning.

"One of the biggest mistakes people make is looking at the returns of mutual funds and go after whatever asset class did best last year. If tech did the best they put all their money in tech. One really has to have an asset allocation plan and realize no one has a crystal ball. It doesn't mean it will do well the next year. Stick with the asset allocation."

Asset allocation should be reviewed at least once a year, and as you near retirement pare back on stocks and put more into fixed income.

In addition to Salomon Smith Barney, a number of other financial institutions such as Fidelity and Charles Schwab offer asset allocation tools that can help you make smart decisions.

-- Updated: May 4, 2001

 

See Also
Savings glossary
More savings stories



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