Asset Allocation in Retirement Investing
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Asset Allocation in Retirement Investing
What kinds of investments should you choose to build your retirement nest egg? The answer is likely to change with the passing of time.
Things To Know
- Asset allocation: putting your money into different investments in different amounts.
- The way you allocate your investments also depends on your risk tolerance.
What is asset allocation?
Putting your money into different investments in different amounts is called asset allocation. The amount you invest in any particular kind of asset depends on (among other things) your time horizon for retirement.
In the short term, cash, certificates of deposit (CDs), and bonds have returns that are the most dependable and the least volatile. But generally, along with lower risk comes lower returns. In the long term, equities such as stocks may have higher returns than other investments. So if you are 30 and have a long time until retirement, you might want to consider placing a larger percentage of your investments in stocks than in fixed-income investments. If you are about to retire, you might want to start investing more in bonds and CDs than in stocks.
The importance of knowing your risk tolerance
The way you allocate your investments also depends on your risk tolerance—in other words, how much of your investment you can afford to lose and are comfortable with losing. If you have a high tolerance for risk, you may be more comfortable in more volatile investments such as stocks, regardless of your age. On the other hand, if you have a low risk tolerance, you may want to seek out more conservative investments.
You might also want to reallocate some of your investments upon reaching retirement. For example, even if you decide to keep the majority of your investments in long-term, higher-risk assets, you may want to move some of your money into short-term, low-risk assets that are designed to generate monthly income and decrease volatility.
What the research says
Research has shown that the asset allocation of your investments has a greater impact on your returns than the particular investments you choose, so it is important to consider carefully how to allocate your capital among investment classes as you plan for retirement. Asset allocation is no "magic bullet," however. It does not assure a profit or protect against loss.
