To help ensure the money you save through your employer-sponsored plan is working as hard as it can for you, it’s a good idea to regularly review your asset allocation. Asset allocation is the process of spreading the money you invest through your plan across different types of investments (also known as asset classes), such as stocks, bonds, and cash alternatives. 1,2,3 It’s a way for you to manage investment risk, because different types of investments have different levels of risk and return potential—and they react to changing markets in different ways. With the proper asset allocation, you don’t over-rely on the performance of one type of asset.
Asset allocation is similar to another risk-management strategy you may be familiar with: diversification. Diversification is the process of choosing multiple investments within a single asset class, such as small-, mid- or large-cap stocks. 1 For example, an investor looking to diversify would choose multiple small-cap stocks — or a fund that consists of multiple small-cap stocks— instead of choosing a single small-cap stock. So, in a diversified portfolio, an investor would have investments in multiple asset classes, as well as multiple investments within a single asset class.
Another thing to keep in mind with asset allocation is that you may want to change your strategy throughout your career as you get closer to retirement. Many investors gradually shift to a more conservative asset allocation the closer they get to retirement age to protect the assets that they’ll soon need for retirement income. In contrast, younger investors often choose higher-risk investments with more growth potential because they have years or even decades to recover from market downturns.
So, which asset allocation strategy is right for you? There’s no single answer. It depends on factors such as your retirement income goals, your current and planned retirement age, and your tolerance for risk. You can learn more about asset allocation on your plan’s website — or schedule time to discuss with your local Retirement Plan Advisor .
- Asset allocation and/or diversification do not ensure a profit or protect against
- Bond prices generally fall when interest rates rise (and vice versa) and are subject to risks, including changes in credit quality, market valuations, inflation, liquidity and default. High-yield bonds have a greater risk of
- Cash-alternative funds are not federally guaranteed and are subject to interest rate, inflation and credit