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5 things to know about asset allocation-2

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3. Determine Your Long- and Short-Term Goals

We all have our goals. Whether you aspire to build a fat retirement fund, own a yacht or vacation home, pay for your child's education or simply save for a new car, you should consider it in your asset-allocation plan. All these goals need to be considered when determining the right mix.

For example, if you're planning to own a retirement condo on the beach in 20 years, you don't have to worry about short-term fluctuations in the stock market. But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments. And as you approach retirement, you may want to shift to a higher proportion of fixed income investments to equity holdings.

4. Time Is Your Best Friend

The Department of Labor has said that for every ten years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. 

Having time not only allows you to take advantage of compounding and the time value for money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A couple of bad years in the stock market will likely show up as nothing more than some insignificant blip 30 years from now.

5. Just Do It!

Once you've determined the right mix of stocks, bonds and other investments, it's time to implement it. The first step is to find out how your current portfolio breaks down.

It's fairly straightforward to see the percentage of assets in stocks versus bonds, but don't forget to categorize what type of stocks you own (small, mid or large cap). You should also categorize your bonds according to their maturity (short, mid or long term).

Mutual funds can be more problematic. Fund names don't always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested.

The Bottom Line

There is no single solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you don't have, don't worry. It's never too late to get started. 

It's also never too late to give your existing portfolio a face-lift. Asset allocation is not a one-time event, it's a life-long process of progression and fine-tuning. 


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