Asset Allocation

Asset allocation refers to the percentage of money you should put into each type of investment.  The asset allocation for your retirement account should be different than the asset allocation for your investment account because the assumption is you will not be needing the money in your retirement account for a long time (30+ years) but you may or may not need the money in your investment account in the next few years.

For your investment account, you should have an asset allocation that reflects your risk tolerance.  If you don’t know what your risk tolerance is, think about your gambling style.  Do you tend to play it safe (low-risk tolerance)?  Or are you a double or nothing kind of person (high-risk tolerance)?  There are also tests you can take to help you get an idea.  Even if you are a conservative investor, you should keep very little in cash/cash-equivalents unless you plan on making a big purchase soon.  Your emergency fund should be enough to cover any unexpected cash needs.

For your retirement account, you should have all or almost all of your investments in equities regardless of your risk tolerance.  This is assuming you’re a millennial and won’t be retiring soon.  Even though you could lose a lot of money in the short run with equities, your portfolio has plenty of time to bounce back.  And like I mentioned before, equities have unlimited potential for growth and will thus, protect you from inflation way better than bonds will.  But the closer you get to retirement, the less you should have in equities and the more you should have in bonds.

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