Asset Allocation: How to Make a Killer Mix

Asset allocation is a bigwig phrase that simply means splitting investments into several categories in an attempt to protect your portfolio while gaining profit. The mix of investments in your portfolio should reflect your risk tolerance, time horizon, and investment objectives. This tactic is believed by many to be the most important factor in investment success because it reflects the strategy in which you weigh your investments. Generally, you will want to consider a mix of stocks, bonds, real estate, and cash to strengthen your portfolio and give it the power to survive the ups and downs of the investing cycle. Here are ten things to think about when looking into asset allocation.

1. How long are you going to play the market? Time is a vital part in investment because it gives great insight into how your money should be spent. Before you invest, decide how long you plan to keep your investment alive. Even if it's just a guess, or a broad range, you need to think about how long you plan to invest, because every year counts. It doesn't matter what you're saving for: retirement, college tuition, or dreams of a new car, you just need an estimate. It is always better to take a step back and focus than to take a crap shot and hope for something great to show up.

2. Are you a risk taker? Basically, how much are you willing to watch your funds drop? We've all seen gamblers go wild while penny pinchers stand on the sidelines; figure out where you stand before you enter the realm of investment. It will make the game much more enjoyable. Don't forget, the more time you have to invest, the more variability you can safely have in your funds' performance. But if this is your first go round, or it simply seems odd tossing money to the wind, you may not be comfortable investing in variable funds (and you may not last as long as you'd hoped if your investments go south), so make sure you're honest with yourself. Don't lose hair and bite nails over an investment, think it through.

3. Decide whether to invest conservatively or aggressively. Now that you know the vital rules of time horizon and taking risk, it is time to strategize your investment. Asset allocation is a process of dividing assets among categories, such as stocks, bonds, real estate, etc. in an effort to "beat the market." Here, with money split among a variety of groups as things rise and fall you are almost always doing well in one area. So, now you just need to decide how much you want to spend. It's usually the youth willing to gamble their lives away- and if you really want to gamble it's the stocks you need to go for. Granted, they will rise and fall like no other, but if you get lucky, just like the lotto, you can walk away smiling with a bigger gain than the bonds who will slowly but surely make a profit.

4. Diversify your assets. Now that the basics have been outlined, you will need to look over and choose which investment plan fits your current lifestyle. These plans are influenced by a variety of things such as age, savings, and even your tolerance, or willingness, to take risk. In most cases, people play with less risk as they age because they have less time to get their money back. So basically, the youth are a bit carefree while those reaching the pre-retirement stage take on less risk, because they will soon be withdrawing money from their portfolio.

5. Mix it up a little. Now that you know how much you're willing to shell out, it's time to choose what's going where. So, choose your asset mix and get creative. For example, a young investor planning for retirement 20-30 years away might choose an aggressive mix of 50-80% in stocks due to an ability to recompense for time fluctuations. On the other hand, someone closer to retirement or someone simply planning to withdraw funds in 1-5 years might be more conservative and choose something like 20% stocks and 50% bonds because they have less time to make up for losses. Investment plans should be reevaluated yearly though, because things change. Make sure your financial status and even your wants are the same before continuing to pour money into something.

6. Look at tax. Tax status can make a big difference in the amount of money actually given to you, and sadly it is often overlooked because at the beginning all most of us pay attention to is the dollar sign, not the fine print. The Oracle preaches that, " The money invested in a 401k or regular IRA is generally before tax, while money in a Roth IRA is after-tax." In simplest terms, this means taxes will be placed on both the 401k and IRA money when withdrawn, but the Roth IRA money is tax-free at withdrawal. So if you want to outsmart the conspirators and watch your investments expand, funds that have the highest expected return should be placed in your Roth IRA to get returns tax-free. The Oracle shows that "funds with lower expected returns go in the 401k or regular IRA to reduce the tax bill at withdrawal."

7. Learn risk-return. Everyone is so focused on monetary return and the heightened fear of investment risk, that the analytical combination of the two is often overlooked. Have no fear, the theory of risk return is quite simple, and if you play it right, it can increase your profitability greatly. Here, the first thing you need to do is evaluate your investment dedication, because sadly its greatest profitability margin is often when you are willing to be brave. Some play it safe while others are high-risk takers, and there are advantages to both. Unfortunately, it is the high-risk takers usually raking in the dough, but every ten years or so when the stock market crashes our nervous pacers are rewarded for their safety.

It's easy for everyone to say that they want the highest possible return, but simply choosing the assets with the highest potential, like stocks and derivatives isn't the answer. In the long run, investors survive by their knowledge and their willingness to apply the rules of risk and return. Sure, investors with a higher risk tolerance should allocate more money into stocks. But if you can't handle the stress of its constant turbulence, you should cut your exposure to equities.

8. Identify your financial goals. We all have our goals, whether it's sending kids to college, stashing money aside for a new car, or simply preparing for retirement. These goals play a vital part is asset allocation and need to be used as a deciding factor in the creation of your plan, because believe it or not, if you play your cards, or your stocks right, you could live a different life when your salary is cut in half. So before making any investment decisions, it is usually wise to take a step back (and sometimes a deep breath) and look at the situation ahead of you.

9. Map out a plan. One of the best ways to put your goals into action is by organizing them into a plan, or a portfolio. When creating the portfolio and preparing to invest, don't forget to consider personal preferences, such as risk return and time availability. Not everyone is as adventurous as the youth, but it wouldn't hurt to branch out into the unknown. Make sure to spread your assets out among things such as bonds, stocks, real estate and cash in an effort to keep potential growth favorable. It is better to have a diversified portfolio rather than to gamble on only one slot, because your placement of multiple assets gives you leeway if the market ever takes a dive. If you invest in only one area and it plunges, depending on your determination to ride it out, there could be trouble. You also should reevaluate your plan periodically, because life changes rapidly and your needs/wants may no longer match your previous ideals. Make sure it still stands parallel with the desires you crave, if not, sit down and reevaluate your investment wishes.

10. Learn the laws of liquidity. Let's face it, the world is very impatient when it comes to money. We don't like waiting in line to pay at the grocery store, we hate waiting at the bank, and we detest financial aid lines. It's not that we're unhappy when we arrive, things are just so backed up that we're irritated by the time reach the counter. When it comes to investment, you need to learn the rules of the system, and liquidity, or how to convert assets to cash without depreciation, plays a major role in investment.

If you are planning to withdraw money in the next few years, lets say one to five, then liquidity should become your new best friend. Here, the act of withdrawal is no problem, but if your strategic investments have been made by gut instinct and "thrill of the game", type moments there may be trouble. We often see with liquidity a more stabilized movement of investment and an ease of conversion. So, if the sole purpose of this investment has been for tuition, a prom dress, or a vacation dream home (all with a standing down payment) don't let yourself get tied up in the snare of a long-term mutual fund that has recently taken a hit.

Instead, let liquidity affect your investment choices, leading you towards things such as short-term bonds, deposit certificates, or even a savings or money market account. These could make a grave difference in you financial success and the stress you endure. Stocks will always be available if you decide to take a gamble, but that's simply what they are, a gamble, and with less time to ride out the dips you could experience a serious downfall. If you are looking for something safe but with a promising growth, stick with bonds and savings, they are the faithful tortoise, "slowly but surely" bringing in more money while also allowing you the ability to readily withdraw your money at any given time.