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Allocating Your Assets
Slide 2: Asset Allocation
Investors often find themselves at a crossroads in determining the asset makeup of their portfolios. Some view stock funds as the most effective means to create wealth, while others might focus on bonds because they carry less risk. Age also plays a significant role in these decisions, with older investors typically placing a premium on preservation and income, and younger investors targeting growth and capital appreciation.
Slide 3: Asset Allocation

Young investors usually have not accrued a lot of wealth and also have many working years ahead of them. Assuming they maintain employment, they can expect a steady income and may take more risk in holding stocks (equities) because they have more time to recover if their holdings perform poorly. 

But as investors approach retirement, they will begin shifting their portfolios to less-volatile, income-producing assets, such as high-quality bonds or certificates of deposit. The Morningstar Investing Classroom provides further guidance on this topic.

Slide 4: Asset Allocation

There's no guarantee that one asset mix will perform better than another, but investors who take on more risk early often can obtain higher returns over time. One can reasonably expect stocks, which have the most risk, to generate more income than bonds over the long term, and bonds to have higher returns than CDs, which are low-risk investment vehicles.

How long is "long term"? As the last 10 years have demonstrated, equities can go through prolonged periods of flat or down performance, especially if investors enter the stock market at a lofty peak (such as during the tech bubble). But dollar-cost averaging into the market over time can mitigate the effects of poor timing by spreading out your investments.

Slide 5: Asset Allocation

Investors who practice strategic asset allocation seek to create a sensible stock/bond/cash mix while they're young and then gradually shift their portfolios more into bonds and cash as they become older. By maintaining a fairly stable strategic asset allocation plan, investors can keep their portfolios diversified while slowly lowering their risk profile over time. Therefore, a strategic asset allocator will make changes to his or her portfolio only if allocations shift heavily from the targets (due to market swings), or when the targets themselves change as the investor ages.

As outlined in the related video below, other investors choose to take a more hands-on, or tactical, approach to allocation in order to be more opportunistic in the market.

Click here to view the accompanying video.
Slide 6: Asset Allocation

Before determining your target asset allocation, take a look at where your holdings currently stand and any recent activity. Morningstar's Instant X-Ray tool is a handy way to see how much of your portfolio is devoted to stocks, bonds, cash, and other assets. You can also see stock sector and regional breakdowns as well as investment style.

If you're new to the investing world, this article offers tips to get you headed in the right direction.

Slide 7: Asset Allocation
If you need help figuring out what your proper retirement allocation targets should be, this chart is a good place to start. Based on Morningstar's Lifetime Allocation Indexes, it suggests allocation targets for an array of anticipated retirement dates. Keep in mind, these allocation targets correspond to long-term retirement goals rather than short-term investments or emergency funds.
Slide 8: Asset Allocation

Additionally, you can gain more insight into how much weight you give assets in your portfolio by answering these simple questions:

Are you expecting other sources of income during retirement, such as a pension?
Yes: You may consider tilting to more equities
No: You may consider tilting to fewer equities

Does longevity run in your family?
You may consider tilting to more equities
No: You may consider tilting to fewer equities

Click here to see additional questions.

Slide 9: Asset Allocation
Finally, you can optimize your asset mix using Morningstar's  Premium Asset Allocator tool. You simply have to enter each of your holdings and their dollar amounts into the tool, and you can then determine if you need to make adjustments to give you a better chance at reaching your financial goals.
Accompanying Video
Allocating Your Assets
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