What is Asset Allocation? Why is this important for your pension fund?

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Social Security isn’t enough to sustain you in retirement, so you’ll need money saved to produce the extra income you need. It can be difficult to amass a large enough nest egg unless you invest and make your money work for you.

Unfortunately, millions of Americans lack crucial knowledge they need to make the right retirement investments. And that could have huge financial consequences.

One of the most important things you need to know when saving for retirement is your asset allocation. Unfortunately, a study of Transamerica Center for Retirement Studies revealed that far too many people don’t know how to do this. In fact, research has shown that only 31% of workers understand very well or somewhat well what asset allocation is and how it works.

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What is Asset Allocation?

Asset allocation involves building a diversified portfolio of different asset classes to expose you to an appropriate level of risk.

You see, there is generally an inverse relationship between risk and potential rewards. A high-risk investment can usually produce a better return on investment (ROI) if all goes well, but with it comes an increased risk of losing your money. Consider betting it all on black at roulette, or investing big bucks in an untested pharmaceutical company in the hopes that a promising cure they’re working on comes to fruition.

On the other hand, investments that carry lower risk generally have a lower rate of return because investors don’t need the potential for a high gain to be convinced to buy a safe asset where it is. unlikely to lose money.

Investors should ensure that they are exposed to an appropriate level of risk given their tolerance for loss. And many factors affect this, including each person’s comfort level with seeing their wallet balance drop, as well as their timeline for knowing when they’ll need the money. Given that asset allocation can be complicated, it’s no surprise that less than a third of workers don’t really understand it.

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What can you do if you don’t know how to allocate your assets?

The best thing to do if you don’t understand asset allocation is to learn about it. It’s doable even if you don’t have a ton of investment knowledge.

To get started, you’ll want to research the potential risks and returns of different asset classes like stocks, fixed income investments, cash and cash equivalents. Next, think about how to divide your funds invested among them depending on your age and how much you are comfortable losing if things don’t go your way. You can also follow a simple rule of thumb that you should subtract your age from 110 and put that percentage of your portfolio into stocks while allocating the rest to safer fixed income investments.

You can also buy a target date fund. With this approach, you buy a fund based on when you need to start withdrawing from your investment account. Your money is then allocated appropriately across a combination of different assets based on your investment schedule. With a target date fund, you don’t need to understand asset allocation at all to get the right mix of investments, but you can expect to pay higher fees than if you built it yourself. your wallet.

Ultimately, it’s up to you whether you want to learn more about asset allocation or not. But if you’re managing your own portfolio rather than opting for a target date fund, you have a responsibility to acquire this knowledge in order to get the right mix of investments.

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