Finding the Right Balance
Asset allocation is the process of deciding how to divide your investment portfolio among different asset categories.
The Major Asset Classes
- Stocks (Equities): Generally offer the highest potential returns but come with the highest volatility.
- Bonds (Fixed Income): Lower risk than stocks, providing steady income and acting as a cushion during market downturns.
- Cash: The safest asset, providing liquidity and stability, but often losing purchasing power to inflation.
- Alternatives: Assets like real estate, commodities, or private equity that often have low correlation with stocks and bonds.
A common rule of thumb is "110 minus your age" to determine your stock allocation percentage, though your personal risk tolerance and goals should always be the priority.