How Many Baskets Do You Need?

You’ve heard it said before, “Don’t put all your eggs in one basket.” But how many baskets do your eggs really need? The answer is different for everyone.

Depending on your individual situation and preferences, you may need more (or fewer) baskets than your family and friends.

One rule of thumb is to incorporate diversification into your portfolio. Simply stated, diversification means to spread your money (or eggs) among several different investment classes (baskets) to reduce the volatility in your portfolio. That way, if one investment declines in value, others that increase (or stay the same) may balance the overall effect on your portfolio. Please note that diversification does not guarantee a profit in an advancing market or provide protection from losses in a declining market.

Taming the Asset Allocation Beast

Asset allocation may be an unfamiliar (or even intimidating) concept to most. But before you run for your copy of Investing for Dummies – or just plain run – relax. Once you understand the basics, you can allocate your assets and diversify your “baskets” like a pro.

The Basics

Investments are grouped into asset classes with familiar names such as stocks, bonds and fixed income securities. One way to diversify is to put a certain percentage of your money in investments from different asset classes.

The percentage you choose to “allocate” to each asset class should depend on three primary factors:

  1. Time Horizon
    In general, investors with a long time before retirement can accept more risk and be more aggressive in their investments for the potential of greater returns. Individuals with a short time before retirement generally cannot accept the same level of risk and move to a more conservative investment with the potential of lower returns.
  2. Risk Tolerance
    Risk tolerance refers to your comfort level with investment risk. Would you prefer investments that seek to preserve your savings but offer lower long-term growth potential? Or, are you willing to tolerate gains and losses with higher-risk investments that may provide higher long-term growth?
  3. Rate of Return
    Historically, investments with higher risk such as stocks offer the potential for higher returns over the long term. Lower-risk investments such as bonds are less volatile and historically generate lower returns over the long term.

Using an asset allocation methodology does not guarantee greater or more consistent returns.

The Bottom Line

Asset allocation is a personal decision. And the “right” allocation will be different for every investor. Your retirement plan has several tools to help determine the right asset allocation for you. Check with your plan administrator for details.

Return to Education Tools

For informational purposes only. Should not be construed as legal or investment advice, a promise of benefit or guarantee of investment performance.

Using an asset allocation methodology does not guarantee greater or more consistent returns.

Questions? Please Call: (888) 917-7120