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| Asset Allocation:
Mixing It Up |
| Asset allocation is just a fancy way of saying, "How do you want to invest your money?" |
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Everyone knows there are lots of broad categories in which you can park your assets—stocks, bonds, and cash. Each of these categories is called an asset class. Stocks can be broken down into smaller sub-classes, such as large-company and small-company stocks. The same goes for bonds (government versus corporate bonds) and foreign stocks (European versus Asian countries). Cash also comes in many different flavors—money market funds, CDs, and US Treasury bills (T-bills).
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Investing in a mix of these asset classes is important. Why? Because it gives your portfolio what investment experts call diversification. An investor who diversifies is like a basketball coach with several good players on the team. If one player has a bad game, the team can still score points. Likewise, if your portfolio is well-diversified you'll still make money even if one of your investments isn't scoring so well.
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For instance, large-cap stocks may do great while small-cap stocks are struggling. And maybe the next time US stocks take a nosedive, foreign stocks will be flying high.
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Hitting upon the right mix of asset classes is one of the most important parts of prudent investing. Putting a large portion of your investment in risky stocks could mean huge returns for you, or it could lead to big losses. Investing in bonds will pad your portfolio if stocks drop, but it probably also means lowering your long-term returns.
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Of course, there isn’t a one-size-fits-all asset allocation. You'll want a mix that's right for your goals, time frame, and appetite for risk.
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