Asset allocation for fund investors
The importance of diversification
Sometimes it seems like the deck is stacked against small or "retail" investors. These investors compete on an uneven playing field against large institutional managers and the people on Wall Street who make the rules of the game. As members of the investing hoi polloi, most individuals would fare best if they followed a diversified asset allocation strategy using mutual funds.
Diversifying across asset classes allows fund investors to mitigate market risk because, the theory goes, different investments perform differently under various conditions. An easy way to get exposure to many different areas of the market is to buy funds that focus on different types of assets -- for example, domestic funds containing shares of small, middle-size and large companies, plus international and emerging markets funds. For additional diversification, add other noncorrelating asset classes to the mix, such as real estate investment trusts, or REITs, and bond funds.
To determine your ideal asset allocation strategy, start by assessing your goals, risk tolerance and investing time horizon.