Finding the Right Asset Allocation for Your Portfolio
As part of Morningstar's Guide to Saving for Retirement, our director of personal finance, Christine Benz, is walking through the key decision points to ensure your portfolio is poised to help you amass the wealth you will need for retirement. Check back all week for fresh content.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
Many investors are stumped by the question of how to allocate their portfolios' assets, dividing them between ultrasafe cash, higher-returning but higher-risk stocks, and bonds, which occupy kind of a middle ground.
The right answer can seem kind of black-boxy. But I think it's helpful to take a step back and consider your spending horizon and the likelihood of having a positive return over that specific time frame. For money you expect to need in the next couple of years, it's wise to park it in cash, whether that's CDs, a checking account, or a money market account. Returns are really low, but cash is the only asset class where your money is guaranteed.
If you have a slightly longer time horizon--say, three years or more--you can invest in high-quality bonds, or a high-quality bond fund. You're taking more risk, certainly, but you'll have the potential for higher returns than you can earn with cash.
Finally, if you have a longer time horizon for your money, you should opt for the highest-returning asset class you can find--and that's stocks. Stocks have actually been reliably positive for people who have time horizons of 10 years or more, but over shorter time frames, their returns have been more erratic. Young investors with no imminent need to spend their money absolutely should have more in stocks, whereas investors getting close to retirement will want to earmark more for cash and bonds.
Thanks for watching. I’m Christine Benz for Morningstar.com.