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Asset Allocation

Choose wisely

How much of your retirement plan contributions you allocate to each type of investment is entirely up to you. Your analysis should consider your time horizon and your tolerance for risk. If you are going to tap into your retirement account in the next four or five years or if every dip in the stock market is unsettling, you may want to offset the potential volatility of stocks in your retirement plan account with a fairly large commitment to bonds or cash equivalents, a conservative portfolio may be for you.

If you’re the type of person who can tolerate the ups and downs of the stock market, but you also want a measure of stability in your portfolio, then a moderate to moderately-aggressive portfolio may be for you. If retirement is a long way off and you can accept the highest amount of volatility in exchange for potentially higher returns, you may want to invest more aggressively.

Invest regularly

As a participant in your employer’s retirement plan, you are benefiting from one of the basic principles of investing, “dollar cost averaging.” Using the dollar cost averaging technique means you contribute a certain amount of money to your retirement account at regular intervals, through thick and thin, in up and down markets. When the market is declining, you pay less per share for an investment; therefore, your contribution buys more shares. During up markets, you pay more per share, and your contribution buys fewer shares of an investment. Over time, however, with dollar cost averaging you will reduce the average cost per share of your investment and lessen the impact of market fluctuations on your account.

Dollar cost averaging at work
The following chart is a hypothetical illustration about a dollar cost averaging strategy that allocated $100 each month into the same investment over a period of six months in a fluctuating market.

Dollar cost averaging chart

Diversification Basics

Source: Transamerica Retirement Services: Brochure:  Market Volatility

Saving Strategies

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Sunday, February 28, 2010 10:56 PM

 
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