Asset allocation helps to balance your investment choices to help you meet your goals and time horizon, as well as align with your risk tolerance.
Quick takeaways
You juggle all sorts of financial goals and demands, from paying for a mortgage or rent, to uncertainty in gas prices and fitting in fun things like eating out or travel. Who has time to think about investing? It’s one more thing on an already full plate. Here’s some good news: An important investing idea doesn’t demand you become a finance expert: It’s asset allocation. Here’s why it may matter to you.
Asset allocation is how you divide the money you invest across different investment options and asset classes. Those asset classes each have different levels of potential risk and reward. The goal is to have an asset allocation that creates balance and helps you reach your financial goals.
Market results change all the time and over time—up and down, then down and up. There’s no exact way to predict what might happen. Asset allocation is a way to deal with that uncertainty. With asset allocation:
- One bad moment in the market may matter less.
- You help to balance growth and stability in your investments.
- You may feel less stress and investing may feel more manageable.
Think of it like the saying “you don’t put all your eggs in one basket:” One dropped basket (or market change) doesn’t break (or upend) your plans.
There are three main asset class types most often referred to in investing. Each behaves differently when it comes to growth and stability. They are:
| Asset class | What it is | Growth and stability |
|---|---|---|
| Stocks (equities) | Shares of companies | Can grow a lot or have greater losses, and values may change quickly |
| Bonds (fixed income) | Loans to governments or companies | Slower growth and low loss potential that’s typically more stable |
| Cash (cash equivalent) | Easily accessible sources of money | Low growth and risk of loss potential but easiest access and most stability |
Like investing, asset allocation is personal; it’s typically aligned to your age, goals, and risk tolerance. Here’s why.
From today until the day you retire is the total time that you have to build retirement savings. More time means more opportunity to compound growth and manage typical economic cycle ups and downs. While those just starting their career may be able to have an allocation with greater potential for growth or loss, to help meet your retirement goals, your asset allocation typically has to change over time. Many people move more toward stability than in growth, with less tolerance for risk, as they get closer to retirement.
Some investment products have built-in asset allocation that adjusts over time; these are typically called target date funds or life cycle funds. Or, a managed account service that provides advice on a mix of investments may offer even more personalization in asset allocation to help meet your specific goals.
Over time, your original asset allocation (mix of investments) can get out of alignment with your original goals (and your goals can change, too). Regularly checking in on your investments helps, as does rebalancing.
Think of rebalancing as a re-set to help maintain your original investment percentage targets. You can rebalance on your own, or set your investments to automatically rebalance.
Here’s the most important part: asset allocation isn’t about perfection. It’s about making thoughtful choices, learning as you go, and staying consistent. The best asset allocation for you is the just-right mix of investments that balances your tolerance for risk and potential reward for your dollars invested over time.
If you have an account at Principal® and want to check your investment mix and rebalance, Login. On your dashboard, find your account(s) on the left-hand side. Click the account to research; then click “Investments” on the top menu. Scroll down to “Investments summary”; your investment mix will display on the right-hand side, look for the “rebalance” option.Talk to a financial professional for specific guidance on your goals and financial situation.
