Step Three:  Asset Allocation - Allocate Your Resources. 

Once you know how much money you are able to invest, determine the structure of your portfolio — that is, how much should be invested in stocks, how much in bonds, and how much should remain in cash.  This apportionment of investments is known as asset allocation.

Asset Allocation

Asset allocation is how the investor's investments portfolio is divided or allocated among a number of asset classes. Examples are stocks, bonds, and cash or cash equivalents. An example of an asset allocation is 60% stocks 30% bonds and 10% cash or cash equivalents. An investor's investments can also be further divided into sub-categories. For example, 60% stocks can be divided into 20% large cap stocks, 20% mid-cap stocks, 10% small cap stocks, and 10% international stocks. Bonds can also be sub divided into long term bonds and short term bonds for example.

Asset allocation for any investor depends on his or her financial objectives, risk tolerance and cash needs.  Some financial advisors use a rule of thumb that links the percent of assets you put in bonds and cash to your age.  Under this rule, an investor in his/her forties might put 40% of his/her money into bonds and cash.  The remainder would go into stocks.

Your asset allocation mix will change over time, depending on your individual circumstances and financial goals.

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Select your investments