Asset allocation refers to the practice of an investment portfolio divided among different asset categories—one of Jason Hartman’s favorite things to talk about! These categories vary greatly, but three of the most common are cash, bonds, and stocks. Cash (and cash equivalents) are usually savings, certificates of deposit, money market funds, treasury bills, and market accounts. These assets are widely considered the safest because they are guaranteed by the federal government. But, you sacrifice higher returns—these particular assets offer the lowest returns and risk falling victim to inflation over time.
Bonds are more risky than cash and less risky than stocks, and also fall somewhere in the middle when we’re talking about investment return. There are many different types of bonds –government, municipal, corporate, and zero-coupon. They vary in terms of length of time for maturity as well, and are a relatively easy to understand investment option.
Finally, we have stocks, which are the opposite kind of investment as compared to cash. Stocks also may be referred to as equities, and mutual funds are also included. They represent a share of a company, which can be held by an individual or a group. They’re high risk, highly volatile, and high return. If you’re an investor who hopes to grow, this is a great option for you.
The best investment portfolios draw from each category and create a beautiful symmetry of financial perfection. Most portfolios (and all good ones) change over time, reflecting both personal and financial growth of the investor. Depending on your particular life stage, your portfolio will be different. While you may be able to make high risk investments at one time, it may be best to stick to “sure thing” investment opportunities at others. Find something that works for you!
Remember, greater risk leads to the potential (though not guarantee) for higher reward on investment. One strategy employed by many is to increase cash and bond holdings in relation to stock holdings, which provides protection for the nest egg. It’s important to set investment goals and change your portfolio to work toward them—good luck, and happy investing!(http://www.flickr.com/photos/[email protected]/5299199423/)