What is asset allocation?
Asset allocation is how your retirement savings are divided among different types of investments, such as stocks, bonds, and cash. The mix you choose plays a major role in how your account grows over time and how much it may fluctuate along the way.
There is no single “right” asset allocation for everyone. The approach that works best for you depends on your time horizon, comfort with investment risk, and retirement goals.
Common asset classes
Most retirement plan investments are built from these basic asset classes:
- Stocks
Stocks offer higher long-term growth potential but can rise and fall significantly in the short term. - Bonds
Bonds are generally more stable than stocks and may help reduce portfolio volatility, but they typically provide lower long-term returns. - Cash or cash-like investments
These investments tend to be more stable but may not keep pace with inflation over time.
Time horizon
Your time horizon is how long you expect to keep your money invested before you begin using it:
- Participants with many years until retirement often can tolerate more exposure to stocks because they have more time to recover from market downturns.
- Participants closer to retirement may prefer a more conservative mix to help reduce large swings in account value.
Risk tolerance
Risk tolerance refers to how comfortable you are with market ups and downs:
- Some people are comfortable seeing short-term losses if there is potential for long-term growth.
- Others prefer a steadier approach, even if it means lower potential returns.
Understanding your own comfort level can help you choose an asset mix you’re more likely to stick with over time.
How asset allocation works in a retirement plan
Many retirement plans offer tools to help with asset allocation, such as:
- Target date funds, which automatically adjust the mix of investments over time as you get closer to retirement
- Model portfolios or asset allocation tools, if available
- The option to build your own mix by selecting individual investment options
Reviewing your allocation over time
Over time, market movements can change your asset mix. It may be helpful to review your asset allocation periodically—especially after major life events or as you get closer to retirement—to make sure it still aligns with your goals and comfort level.
Need help reviewing your current investment mix or choosing an approach that fits your goals? C onsider scheduling a one-on-one call with our team using the following link: Schedule a meeting.