Don't Put All Your Eggs In One Basket (Asset Allocation)
There are three basic places where you can invest your money:
CASH - includes certificates of deposit, money market funds and Treasury bills
BONDS - includes mutual funds
STOCKS - includes mutual funds
Reasons Not to Put All of Your Eggs in One Basket:
- It is very hard to predict what investments will do best in any given year.
- In some years, bonds have the best returns.
- Yet, stocks have historically the strongest record of high returns over the long term.
- Cash investments usually provide the lowest return.
What is Asset Allocation?
Asset allocation simply means that you decide how you will invest your savings among the three basic places.
For example, if you are going to invest $100 and you have decided that you want to have:15% in Cash, 25% in Bonds, and 60% in Stocks
You would put:
$15 in Cash, $25 in Bonds, and $60 in Stocks.Each time you invest, you would split up your money in the same way.
How Much Should I Put in Each Type of Investment?
Financial planners, brokers and mutual fund companies often give different examples or formulas, depending on a number of different circumstances, including how much risk you want to take and how soon you need the money.
Some rules of thumb:
Keep cash reserves equal to 3 - 6 months of your pay for emergencies.
If you are saving toward a goal that is
- 1 to 3 years away, put more into cash investments
- 3 to 10 years away, put your money into a mix of cash, stocks and bonds
- 10 years or more, invest primarily in stocks
Some financial planners suggest that you subtract your age from 100 and invest at least that percentage in stocks. For example, if you are 45, you would put at least 55% into stock funds. Others suggest that is too low, especially if you are saving primarily for retirement, which would still be 20 years away.
