Asset allocation is the diversification of your retirement account across stocks, bonds, and cash. Your age is a primary consideration when determining how much to allocate to each asset class. The amount of time you have left before retiring is a major factor in determining what strategies may be most effective for your retirement savings.
As you approach retirement, it's important to adjust your asset allocation to reduce risk and increase stability. This means shifting your investments from more volatile stocks to less volatile bonds and cash. While significant market downturns can cause distress, you may find comfort in knowing that just a couple years of patience and spending from less volatile assets can help weather the storm.
Many beginning investors feel overwhelmed when trying to design and implement their investment portfolios. This detailed plan should help: Start by determining your retirement goals, risk tolerance, and time horizon. Then, consider how different asset classes can help you achieve those goals. Finally, create a diversified portfolio that balances risk and reward.