retirement

Asset allocation helps mitigate risk

People who are less inclined to while away their days thinking about statistics and standard deviations can still employ these techniques.

Imitate the experts
For investors who want to explore a bit out of their depth, learning to optimally combine mutual funds of varying market capitalizations and valuations according to their own risk tolerance can help them engineer their own portfolios successfully -- no market timing required.

Resources abound in the form of asset allocation strategies from people who have already done the math. Simply follow a model that has been developed based on statistics from the last 50 to 100 years, says Tom Ruggie, Certified Financial Planner and founder of Ruggie Wealth Management.

"Realistically, they can put their money into an asset allocation plan and, given a long enough time frame, there is some predictability as to what will happen," he says.

Of course, since they're built on historical models, there are no guarantees.

The important thing is that investors understand why they're investing in different asset classes and how they work together. Do enough research on specific investments to feel confident about your choices. Understanding the reason for choosing each investment may help you stick with your portfolio through good markets and bad.

"In our workshops and podcast, what we do is show people the very best way that we think they can build a portfolio for all seasons," says Thomas Cock Jr., financial educator with Merriman Berkman Next.

"Not shifting from this asset to that asset -- we are not trying to chase what is going on with commodities for instance, but what we are trying to do is get people to have a global diversification of a great variety of asset classes," he says. 

How to get started
Portfolios will be divided first into two pieces: equity and fixed-income. Some younger investors could dispense with the fixed income side altogether.

"Young people should be all in stocks," says Cock. By young, he means until age 30 or 35.

You may be called upon to summon patience, fortitude and perspective to wait out any dips in the market, prolonged as they may be. 

"Unfortunately what I have seen is that people graduate from college, get a job, get into all stocks and then stocks go down for three or four years," Cock says.

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Then they move everything into bonds and say bonds don't work either, he says.

"Essentially, they become bad market timers, moving in and out of the market at the wrong times."

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