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Asset allocation is choosing
the right mixture of different asset types – stocks, bonds and cash investments
– to meet a financial goal.
Asset allocation is very important; a wise asset allocation strategy will make the
difference between a legitimate investment plan and just a bunch of investments. In fact,
research has shown that over 90% of your total investment return comes from getting the
appropriate mix of long-term investments, not from following stock tips or trying to
"time the market."
In order to determine the best asset allocation for you, you need to figure out three
things: your financial goal, your "time horizon," and your risk tolerance.
With a 401(k) account, your financial goal is how much income you would like to have in
retirement.
As for your time horizon, if you have quite a few years to go until you retire, you might
consider a strategy that focuses on maximizing the return you will make between now and
retirement. This is called a "growth" strategy – one in which making money
over a long time horizon is your primary concern. As you get closer to retirement, you may
want to shift to a "growth and income" strategy – one that continues to
accumulate money for your retirement while preserving your capital.
You also need to determine your tolerance for investment risk (i.e. how comfortable you
are with fluctuation in investment returns). You can get an idea of your risk tolerance by
asking yourself questions such as: are you more worried that your account will decline in
the short term, or that it won't grow enough to meet your retirement goals?
At this point, many people find it helpful to consult with an investment or financial
advisor. Based on a person's investment goal, time horizon and tolerance for risk, it is
possible to calculate the most "efficient" allocation mix (the one that offers
the best potential return for a given level of risk).
Many companies are turning to firms like 401k Forum to provide investment and asset
allocation advice to their 401(k) plan participants. 401k Forum, an independent investment
advisor, takes over fiduciary responsibility for the plan and provides participants with
the answers they seek. It's a win-win situation for everyone – participants get
personalized investment advice, and plan sponsors get the peace of mind of knowing that
their 401(k) participants are in good hands. To get more information about how to get 401k
Forum's services for your company, link to our Visitor Center and request an e-mail to
send to your company's HR department.
If your company does not yet offer investment advice as part of its 401(k) plan, and
consulting with an advisor isn't an option for you, your company's HR or benefits
representative can probably provide educational materials to help you select an asset
allocation. You may also want to check out the 401Kafe’s online investment basics
course, Wall Street 101. |
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