Saving on its own is a good and important first step towards outlining your financial future. But as you get older and earn more and save more, you need to revisit asset allocation as well.
At a very simple level, asset allocation refers to dividing all the funds inside your investment portfolio into three buckets, bonds, cash, and stocks. You’ll need to consider your own time goals and risk comfort level to align your asset allocation.
With bonds, these historically provide lower rates of return when compared with stocks, but are also considered more conservative and safer assets. Stocks offer the highest rates of return but are generally considered more aggressive or riskier assets. Finally, cash or ccash-like assets such as certificates of deposit or treasury bills and money market mutual funds provide low levels of risk with potential upside.
Working directly with your team of financial professionals is the best way to determine if your current levels of asset allocation are aligned with your individual goals and level of risk comfort. If you’re relatively new to investing, many choose to stick with index funds or exchange-traded funds.
If you have a short time horizon, a sudden drop in the market could have a significant impact on your investments and make it more difficult for you to recoup losses. This is why many asset allocation experts recommend that short time horizon goals be aligned with savings, money market accounts, or CDs and other cash assets. However, with a longer time horizon, you have a lot longer window before you need your assets. Meaning that you could potentially take on more risk. Discuss the specifics with your team of financial professionals to determine which level of asset allocation is most appropriate for you.