Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one, the asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk. Below are 6 models we can use as a starting point for allocating your investment account.

Time Horizon - Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets. By contrast, an investor saving up for a teenager's college education would likely take on less risk because he or she has a shorter time horizon.

Risk Tolerance - Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low-risk tolerance, tends to favor investments that will preserve his or her original investment.

Risk Tolerance

Stocks

 Large Cap

Small Cap

International

Bonds

Cash

Aggressive

95%

40%

25%

30%

0%

5%

Moderately Aggressive

80%

35%

20%

25%

15%

5%

Moderate

60%

30%

15%

15%

30%

10%

Moderately Conservative

40%

20%

10%

10%

45%

 15%

Conservative

20%

15%

0%

5%

55%

25%

Short Term

0%

0%

0%

0%

40%

60%

 

The Magic of Diversification: The practice of spreading money among different investments to reduce risk is known as diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing
too much potential gain.