I received the coolest chart in the mail today from T. Rowe Price, so I had to share. They call it their Asset Allocation Chart; it is a quick tool to help you decide how to manage an investment portfolio depending on the timeframe you will need the money.
What I liked in particular about this simple chart, was it went beyond the basic retirement portfolio and offered some advice on shorter-term investments as well. If you are not already an account holder at T. Rowe Price, I am sure you could call them to have one sent to you. Their customer service number is 1-800-541-2704.
To summarize some of the basics, the chart is a simple pull through folder… where you determine when you will need the money and how long the money needs to last. The chart tries to balance riskier investments that will bring you a higher return with more stable investments that prevent you from losing your money.
Let’s say you are saving for your 8-year-old’s college money. You will need to start using this investment in about 10 years and it needs to last for 4 to 6 years. Based on that, the chart shows that 60% of your investments should be equity based higher risk stock accounts, 30% should be a fixed income bond account, and 10% should be short-term accounts like CDs or money market.
If instead you are trying to save to buy your first home in the next couple of years, the investment mix dramatically shifts. In this scenario, based on the chart, all your money should be in only short-term accounts. As not only will you need the money quickly, you will use most of it all at one time.
Whether you use T. Rowe Price’s simple tool or one of your own, taking the time to save and invest correctly can help you to achieve your goals.
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