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Asset Allocation
We all know that variety is the spice of life. But did you know that variety is also a great way to lower and control your investment risk? It's easy to do this, thanks to a practice called asset allocation. To start, think of that old saying, "don't put all your eggs in one basket." Asset allocation begins with spreading your investment dollars and risk among different baskets, or "asset classes," such as stocks, bonds and cash.Asset class = a broad category of investments (stocks, bonds, cash, inflation-protected securities)
Thinking about broad asset classes before you think about choosing investments is a great way to simplify investing. It's like looking at a forest and focusing on the different types of trees, instead of each leaf on each tree. One simple way to practice asset allocation would be to invest money in equal amounts among each asset class. Of course, there are many different ways to split up your money - and some are much better than others.Why is asset allocation important?
- It determines how much your money is likely to grow over time. Over long periods of time, investments in stocks have grown much more in value than those in bonds or cash. Most people saving for retirement have some money invested in stocks to help grow their savings.
- It determines the day-to-day risk in your investments. Over short periods of time, stock prices can jump around a lot. The more you have invested in stocks, the more your investments are going to change in value from day to day.
- It's one of the best ways to diversify your investments, because you're spreading the risk of investing around different kinds of investments. Different asset classes often go up and down in value at different times. So when you invest in several different types of asset classes, you help protect yourself from big losses.
How should you use this information? When deciding how to invest your money for retirement, it is more important to decide on the best mix of different types of investment funds than to try to pick the right investment fund company. Focus on your retirement investments' asset allocation. The MyFRS Financial Guidance Program can help you find an asset allocation that's right for you.
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