What is asset allocation?

Often, life is a balancing act. That goes for your finances, too. Finding the right balance between return and risk in your asset allocation can have a positive impact on your long-term goals.

Stay classy

Simply put, asset allocation is the percentage of money you direct into each of the major investment asset classes: stocks, bonds and cash accounts. Each of these asset classes has a different level of investment risk. For example, stocks generally have higher risk, but also higher potential returns. Cash accounts usually have the lowest risk, but also the lowest returns. Bonds tend to fall somewhere in between. How you divide your retirement savings among these asset “classes” — which is your asset allocation — can determine your overall portfolio risk and potential for return even more directly than the individual investments themselves.

Keep your balance

By understanding the potential risks and returns for each asset class you can make more informed decisions about how to rebalance your asset allocation as you move through life. Typically, younger investors with a higher risk tolerance choose stocks, which can help their portfolio balance grow more quickly. In contrast, older investors tend to have a healthy mix of bonds and cash accounts to reduce their risk and ensure they have access to the money they’ve earned.

Set it on autopilot

Portfolios generally require rebalancing at least every 12 months. But not everyone has the time or know-how to regularly rebalance his or her portfolio. That’s why some employer retirement plans and Individual Retirement Accounts (IRAs) offer automatic rebalancing, which makes it easier to stay on track. Another investment tool, the target date fund, also offers automatic rebalancing. These funds take into account your estimated retirement date and periodically adjust your portfolio with an allocation mix that becomes more conservative the closer you get to retirement.

Stay on track

You may want to select an asset allocation that aligns with your long-term goals, time horizon and risk tolerance. Then, keep it steady by rebalancing regularly. As your needs and risk tolerance change, you may choose to make adjustments to your allocation and continue to rebalance to stay in control. At every step, financial professionals like those at Voya Financial Advisors can help you make decisions that can keep you on track for a more comfortable retirement. In addition, some employers offer advice services within their retirement plans that can advise you on the appropriate asset allocation and even offer to keep you on track.