A moderate asset allocation strategy involves a higher allocation to stocks than does a conservative strategy. Stocks are generally more risky than bonds for a few reasons.
"An equity is a security which is a residual claim on the assets of a firm. If there is a bankruptcy, other folks get paid before the equity owners. In exchange for coming last in line, there is potentially more upside," says Farr.
Upsides of stocks include possible dividend payments and increases in share price, also called capital appreciation.
To find the best mutual funds for your allocation plan, Mladjenovic recommends first determining the appropriate category and then filtering down the choices from there.
"People often choose the (fund) that is just in the wrong category," he says. He cites an example in which an adviser put his client's college fund into an Internet stocks fund.
"I thought it was a ghastly decision," he says. "In that fund, they could have chosen the greatest Internet stocks in the world, but it was too great a risk," says Mladjenovic.
When evaluating actively managed funds (as opposed to index funds), compare their cost, management tenure and their performance relative to their peers and benchmark.