The basic concept of diversifying your assets is found in the classic saying, “don’t put all your eggs in one basket.” If you have all your eggs in one basket and a large rock falls on it, all the eggs crack. Needless to say, if you have all your money in one company’s stock and that company goes out of business… your money cracks as well.
The meaning of asset allocation is the spreading out of your money over lots of different kind of investments. Good examples of these assets include stocks, bonds, and savings accounts. You should spread your money out amongst these different large asset categories, and then again, within each category your money should be diversified. An example of this could be to break your retirement portfolio into 50% stocks, 30% bonds and 20% in CDs. Then… you would further break those up into a variety of different stocks and bonds. There are truly endless options, and much of the decision will depend on your specific investment needs.
A good financial advisor can help you determine the best asset allocation. You can pay for a financial planner, or even get free advice from a couple sources. If your employer has a 401k plan, the organization will have a representative you can talk to free. In addition, many banks and mutual funds will give you free advice on setting up the appropriate diversification. You may even want to ask all of these individuals to compare and contrast the advice you receive.
Whatever way you get there… the key is to focus correctly on asset allocation. This is the only way truly to protect your investments. Don’t let fluctuations in the economy significantly influence your life’s goals. Balance your risk across several types of assets to ensure you always feel safe and comfortable.
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