An asset allocation model is a formula for distributing your total assets among different types of investments — primarily stock, bonds, and cash, or the mutual funds that buy those investments. One classic example calls for putting 60% of your portfolio in stocks, 30% in bonds, and 10% in cash.
The key is to choose a model that has the highest likelihood of helping you achieve your financial goals at a level of risk you’re comfortable taking. Then, as your life situation and tolerance for risk changes, or as you get closer to reaching a particular goal, you’ll want to adjust your allocation.
For example, you might have as much as 90% of your portfolio in stock early in your career, but over time, you might reduce the amount of stock to 40% to lower the volatility of your portfolio as you near retirement. Similarly, a major life change that affects your financial situation, such as the arrival of children or responsibility for the care of an elderly relative, may mean that you want to lower the level of risk in your portfolio.
You can work with your financial adviser to determine an initial allocation model and refine it as time goes by. You’ll find that investment professionals regularly revise the allocations they’re suggesting in response to shifts in the market or their expectations for the future. But, in fact, the changes from month to month or even year to year tend to be within a fairly narrow range.
