Tips on Portfolio Allocation for Stock
- Wall Street in New York City is ground zero for stock trading.Driendl Group/Photodisc/Getty Images
Portfolio allocation operates on the idea that keeping all your money in the stock market 100 percent of the time is not always a perfect plan. Depending upon the prevailing economic climate, most financial analysts will tell you to periodically shift your resources around. At times, you'll be heavier in stocks, at other times bonds, and sometimes cash, depending upon the relative strength of each instrument at the time. Keep in mind there are no hard and fast rules -- just opinions -- as to the exact allocation percentages. - When deciding how to weight your portfolio, you'll first need to consider what the time horizon is to reach your financial goals. Investing for a retirement that's 40 years away allows for a greater assumption of risk than if the goal is to pay for a child's college in five years. Stocks have traditionally been the asset that offers the greatest returns and carries the most risk. In the first case presented (distant retirement) you've got plenty of time to ride out market fluctuations. Loading your investments toward the stock market is a smart play. If you're more concerned with preserving your money for a short-term goal, skewing your portfolio toward the bond market might make more sense. They deliver a more modest rate of return but are less risky.
- Risk tolerance refers to the amount of investment risk you're comfortable taking while still being able to sleep at night. In other words, is it more important to preserve the capital you have and grow it slowly or do you not mind taking a greater risk of losing money for the enhanced chance of reward. The completely risk-adverse investor should stay heavily invested in the safer asset of bonds. Risk takers might put the majority of their portfolio not only in stocks but a certain percentage in riskier stocks like startups and technology companies. The thing to keep in mind, as you've likely heard a hundred times before on television or radio ads touting a particular investment -- you could lose part or all of your money. The only way to absolutely not put your money at risk is hide it under the mattress but, even then, the effect of inflation will constantly devalue it, so that's not a foolproof choice either.
- According to MSN Money columnist, Jim Jubak, the allocation breakdown between stocks and bonds will vary depending upon how you perceive the stock market will behave going forward. All the following examples assume at least 20 years until retirement. A conservative investor who believes stocks will fluctuate between good and bad cycles should go with 60 percent stocks and 40 percent bonds. A conservative investor who thinks that the stock market will perform strongly for a while might go with 80 percent stocks and 20 percent bonds, while an investor who is relying on his 401k completely for retirement should be 100 percent in stocks for maximum chance of growth. It would be a great idea to talk to a financial counselor before investing in anything.
