BOSTON (CBS) – Most investors don’t even know they are in the wrong type of investment 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 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 retirement so you invest the portfolio in a 100% stocks.
Let’s fast forward here. It is now 2013 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 something safer, CDs, money markets, short term bonds or bond funds. How much of an asset allocation change? Depends. Could be as much 50%.
A wedding for your daughter is a short term goal. The money should be safe and not in the stock market. CDs, money market, Treasuries.
A college education for the little one who is now 2. 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.