Allocate Your Assets. DEVELOP YOUR FINANCIAL PLAN

Asset allocation is the assignment of your funds to different investment asset classes such as money market funds, bonds, stocks, real estate, gold, options, and futures. Your particular asset allocation plan depends on several factors such as your time horizon, tolerance for risk, and personal financial situation.

FIGURE 1-3
(a) Asset allocation plan for a married couple in their thirties.
(b) Asset allocation plan for a married couple in their midforties.


In general, the younger you are, the greater can be your allocation toward capital growth investments (common stocks and real estate). The closer you are to retirement, the greater should be your allocation to bonds and money market securities, which provide income, and the smaller should be your allocation to stocks, which provide growth to the portfolio. Figure 1–3 gives two examples of asset allocation plans: The first is for a married couple in their thirties who are investing primarily to build a retirement fund over 30 years. The second is for a couple who are in their mid-forties, indicating a slightly reduced percentage allocated to stocks with a 20-year time horizon to retirement.

Asset allocation plans are evaluated periodically when your personal financial circumstances change. Table 1-3 illustrates guidelines for determining your particular asset allocation plan.

Table 1-3
How to Determine Your Asset Allocation Plan
Financial planners use this rule of thumb method for determining the percentage to allocate to stocks:
Percentage amount to allocate to stocks = 100 – your age
For example, if you are 65 years old, you would allocate 35 percent to stocks and divide up the balance to other investment asset classes (bonds and money market securities). This is the starting point to your plan, where the categories will be adjusted for your financial circumstances and risk tolerance.

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