BOSTON (CBS) – This is a biggie and most people don’t even know they are messing with it until it’s too late. Asset allocation is simply what your money is invested in; stocks, bonds, cash, real estate. Your time horizon is when you will need the money to pay for the goal.

For example, the goal is a comfortable retirement. So you take advantage of your 401(k) plan at work and start to squirrel away money. You’re getting the company match of 3% so you are thinking you are doing well. Your time horizon is 25 years to your actual retirement so you invest the portfolio in a 100% stocks. You want to be growth oriented.

Let’s fast forward here. It is now 2012 and you are approaching that magic Medicare age. You are thinking retirement in a couple of years. You look at your 401(k) statement and you are still 100% invested in stocks.

As you get closer to reaching your goals, your time horizon changes and that in turn should trigger a change in your asset allocation. So if your retirement is in sight that 100% stock portfolio is much too risky for you. You need to begin selling off some stocks 5 to 10 years before your retirement and investing those monies in CDs, money markets, short-term bonds or bond funds.

How much of an asset allocation change? Depends. Could be as much 50% or as little as 30%. You need to know what your retirement income is going to be and then you can figure how much you’ll need from your portfolio every year to supplement that income.

The one thing about retirement planning is that it can be a moving target. If you are still recovering from the bear market then you may just need to work longer or find a part-time job in retirement.

What if the goal is a wedding for your daughter? Short-term goal. The money should be safe and not in the stock market. CDs, money market or short-term bond funds, Treasuries or even EE bonds will work here. I know the interest rates are miserly but the money will be safe!

A college education. Here there is no moving target. The kiddo is 2 so you know in 16 years you will need the dollars to make the first tuition payment. If you are in a 529 plan often times the asset allocation is done for you, moving away from stocks and going into cash and bonds as the child gets older.

If you are doing it on your own when the kiddo is around 14 you need to begin putting new monies in safe investments and selling some of the stock portion so you have the cash available to pay for school.


You can hear Dee Lee’s expert financial advice on WBZ NewsRadio 1030 each weekday at 1:55 p.m., 3:55 p.m., and 7:55 p.m.

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