You can invest your portfolio to achieve the dual goals of growth and safety by distributing your investments among the three major asset classes: equity, fixed income, and cash or cash equivalents. Investing in all three will help to protect you against major losses, since historically, stock, bonds, and cash investments not only produce returns in different ways, but tend to provide their strongest returns at different times. In most cases, if one asset class is performing poorly, the other two are doing better.
Asset allocation is a two-step process: First you assign a percentage of your entire portfolio to each asset class. Then you select a variety of investments within each of the classes to make up that percentage. For example, if you were investing $10,000 and you allocated 30% to fixed income, you’d buy $3,000 worth of bonds.
Your investing style will determine what percentage of your portfolio you assign to each asset class. Depending on your age, risk tolerance, and your other retirement assets, your style might be described as aggressive, moderate, or conservative. Aggressive investors’ portfolios target growth by investing heavily in stock and stock mutual funds, despite the risk of short-term losses that they carry. Moderate investors might invest 40% to 60% of their portfolios in stock or stock funds and the balance in bonds, bond funds, or other fixed income investments. Conservative investors target capital preservation and weight their portfolios more heavily towards cash investments.
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