Courting lady luck is a risky proposition in the business of investing. Picking stocks and timing the market is hard, but developing a solid investment strategy is easy when you approach it as a science.

"Building a portfolio is not an art, it's engineering," says Kirk Kinder, Certified Financial Planner and owner of Picket Fence Financial in Bel Air, Md. Once you know the basic asset classes you should invest in and how much of your funds should be allocated to each, picking the right investment becomes the final step.

"Asset allocation will actually drive about 94 percent of the total return in your portfolio. That's been documented in a number of different places. That's why you need the right asset mix within the portfolio," says Kevin Brosious, certified public accounant, CFP and president of Wealth Management Inc. in Allentown, Pa.

Minimizing the fear factor

Asset allocation strategies

Aggressive portfolio
An aggressive portfolio is most appropriate for younger investors or those with a long time horizon. It's geared for growth and should include a number of different asset classes, as shown, to improve performance and reduce volatility. Investors willing to assume a high level of risk have been rewarded, historically, with annual returns of between 9.5 percent and 10.5 percent. Of course, past performance is no guarantee of future returns.
Moderate growth portfolio
This portfolio is most appropriate for investors who are approaching retirement. Most people prefer to dial back on exposure to equities as the investment window narrows. With less time to recover from market dips, keeping a larger percentage of money protected from volatility makes sense, as does keeping a larger reserve of cash equivalents for distributions. However, the portfolio still has a sizable equity component because a young retiree needs the portfolio to last 30-plus years. Historical returns have averaged between 8.5 percent and 9.5 percent.
Moderately conservative portfolio
This structure is usually most appropriate for retirees who want more stability of principal within their portfolio. This allocation gives an investor a moderate exposure to the stock market for some growth but fixed income makes up the majority of the holdings. Again, in anticipation of distributions or withdrawals, a large portion may be held in cash equivalents or short-term bonds. Historical returns have averaged between 7.5 percent and 8.5 percent.

Courtesy of Kevin Brosious, CPA, CFP and president of Wealth Management

Risk tolerance measures the likelihood that you will spend long, sleepless nights crying over the inevitable dips in your portfolio, and it is a second factor in determining how much money should go into each investment class.