A crazy little thing called Asset Allocation

finding the right mix of assets and asset allocationIn our first three lessons we talked about the types of risks people should be taking depending upon their ages, and how to play it smart when you want to be risky and or when you are close to retirement. This lesson will focus on categorizing your major investment choices in your 401k. Within your 401k plan you will be able to select to invest in Bonds, Stocks, Cash, and or other small categories like Real Estate and such (considered long term choices).You can invest in all or one, or none for that matter. In addition, you have shorter term choices such as money markets, CD’s from your bank and or other savings type accounts. For now, we will discuss the long term options in greater detail, because we are focused on retirement planning here. So, what are these different types of assets and how much of each would be the best for you?

First, let’s start with talking about what each category or asset type within your investment choices are:

Bonds: this type of asset is the rather secure or less risky than stocks. In general, bonds offer set interest payments for your investment. Bonds are typically sold by governments and corporations to pay for different things. The US federal government sells all sorts of different bonds to help build bridges, highways, and a bunch of other stuff. Government has a plan to generate the money to pay off the bonds through different means and in case of the US government, they have an excellent track record of paying back what they are supposed to. Because these payments have almost always been paid back, they aren’t considered very risky, and the amount of money they pay you in return for investing in them is substantially lower than other more risky asset options. Corporations and other types of entities have these same investments that governments offer, however, they may be slightly riskier as they are only backed by townships and or a Corporations good name.

Stocks: Stocks are the biggest chunk of an average investors portfolio (or mix of assets). You can find so many different types of stocks it would blow your mind. Stocks offer the greatest potential for growth and at the same time loss. Stocks can be very risky or not risky at all, it depends on the nature of the stock in question.

Cash: This is less risky than Bonds and is even backed in some cases by the Federal Government of the USA, but it is the least profitable. When you put some of your money into cash, you are typically investing in different types of savings accounts, money markets, or other things like Treasury Bills. The biggest problem with investing in cash is the risk of inflation (when your money buys less and less due to the sinking value of our money compared to other coutries money).

Real Estate and other types of Investments: The are man ysmall investments you may elect to invest your assets in, however, keep in mind that each one of these has their own set of risks and rewards.

Now that you understand what each of the major categories you can start to think about how to allocate your assets within your 401k based upon your retirement needs and your risk tolerance. So, when we talk about “asset allocation,” we are really talking about how you should spread your investments among the different options available.

In lesson 8 we will discuss how you determine what mix of assets would best suit you, or a typical person of a certain age.

We have tools available to help you. We will discuss this in greater detail later.

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