What does asset allocation mean in the world of retirement planning? Choosing where you will place your money can have a substantial impact and security on your life during your retirement years.
What is asset allocation?
Asset allocation refers to how you will divide your investments. The most common choices are stocks, bonds and cash.
Approaching asset allocation correctly
Financial planners will tell you that when you go through the asset allocation process, you want to diversify your investments. Diversifying your investments is best, as it will protect your assets from changing marking forces. If one investment is hurt by a market change, the others will likely remain stable. Working with an experienced financial planner will help you determine what percentage of your assets should be allocated to each category of investment.
Common asset allocation strategies
Because there are a handful of allocation strategies, it is vital that you speak with an expert planner and allow them to determine which one will serve you best for managing your investment portfolio. Some common methods are:
- Strategic asset allocation: investments are divided into percentages based on the expected rates of return for each asset class.
- Constant-weighting asset allocation: investments are frequently changed and moved around based on changes in the market.
- Tactical asset allocation: asset allocation is based more on short-term conditions than long-term projections.
- Insured asset allocation: a base value of the portfolio is established, and if the value rises above this, risks can be taken with investments, but if it returns to the base value, investments are allocated to risk-free assets.
Some of these strategies require more activity than others, so when you speak with a planner, know how active you want to be in managing your portfolio.
Asset allocation may be the most important aspect of retirement planning. Make sure you select an experienced financial planner to help guide you through the process.
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