Selecting Your Asset Mix
Asset allocation means dedicating certain percentages of your holdings to broad asset categories like stocks, bonds, real estate and cash as a way to achieve your financial goals while managing risk.
This strategy can work because different categories behave differently. Stocks, for instance, offer potential for both growth and income, while bonds typically offer stability and income. The benefits of different categories can be combined into a portfolio with a level of risk you find acceptable.
What allocation is right for you?
Asset allocation helps investors balance the returns they want with an acceptable level of risk. Your asset allocation should be based on your investment goals, time frame, and risk tolerance.
In retirement, you might want to emphasize bonds and cash for income and stability. But don’t overlook stocks, because you need to keep up with inflation.
If you won’t need your money for 25 years, a financial advisor might recommend an asset allocation of 100% stocks. That wouldn’t mean investing in only one stock. You’d still want your portfolio to be diversified across a variety of stocks.
Preparing for emergencies
When considering your asset mix, don’t forget to set aside money for emergencies. Life is full of situations such as serious illness, job loss, and divorce for which it’s hard to plan. So, it’s wise to put aside cash reserves for the unexpected. Aim to build an emergency reserve which can sustain you for 3-6 months.
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Help with selecting your asset mix
Our Wealth Builder worksheet can help you select your asset mix. See the Relevant Links box.
Before investing, one needs to understand the various investment options thoroughly. If you think you do not have time or expertise to manage your money, leave it to professional fund managers like mutual funds.
For more information on mutual funds and the advantages of investing in them, see Fund Basics in the Relevant Links box.
SOURCE:FRANKLIN TEMPLETON INVESTMENT