Implement an Asset Allocation Strategy

Asset allocation is the process of investing your money in a diverse set of various asset classes. Some of the most common asset classes are stocks, bonds and real estate. The goal of asset allocation is to both increase return and lower risk to the investor.

First you will need to have a basic understanding of asset allocation. Key concepts include diversification of asset classes, rebalancing of your portfolio, and correlations between asset classes. There are several good books that explain these in detail.

After you have an understanding of the basics, you will need to understand what investment plan is best for you. This is influenced by your age, your goals, your existing savings and your tolerance for risk. Younger people typically take on more risk because they have a longer "horizon" to help smooth out the ups and downs. Pre-retirement people take on less risk, as their horizon is much shorter and they will soon need to start drawing some of their living expenses from their portfolio.

A well thought out investment plan will help you decide what mix of stocks, bonds, real estate and other assets to hold. It is important to rebalance your portfolio at least once per year to make sure you are sticking to your plan.

Your investment plan will likely change over time. So as you get older, make sure to re-evaluate your plan and make any necessary changes to your portfolio.