Personal Finance for Professionals by Susan A. Berson

Author:Susan A. Berson
Language: eng
Format: epub
Publisher: American Bar Association
Published: 2015-02-14T16:00:00+00:00

SELECTING AN ASSET ALLOCATION

Asset allocation involves determining how much money you want in each of the four categories of investment. “Don’t put all your eggs in one basket.” That’s the theory behind diversification, and that’s how asset allocation works. When one sector has low returns,1 the other should have high returns; diversification ensures a balance so a single downturn won’t financially wipe you out. Cash, stocks, bonds, mutual funds, and cash equivalents (e.g., Treasury bills, CDs) will make up a diversified portfolio. Tolerance for risk, age, life events, how much time you have before you’ll need the money, the current status of the market, interest rate decreases/increases, and predictions for the future are factors that will help you choose from ultraconservative to extremely aggressive allocations. Generally, stocks have the highest return and highest risk,2 bonds offer lower returns and lower risk, and money market accounts are the lowest return and lowest risk.

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