Asset Allocation Advice for the Young

Asset allocation is an important aspect of investing. The asset allocation of your portfolio should depend greatly on your age and how much time you have left to invest. Here are a few things to consider about asset allocation if you are young.

Asset Allocation

Asset allocation deals with how much money you have devoted towards a particular type of asset in your portfolio. For example, you might decide to invest 60 percent of your money into stocks and 40 percent of your money into bonds. You would then try to stick to those percentages for a certain amount of time. If your portfolio became unbalanced, you would sell the appropriate amount of shares and buy more shares from a different type of asset. Choosing the right asset allocation can play a vital role in the success of your portfolio. 

Asset Allocation for the Young

If you are still young, you will most likely want to invest in a majority of stocks. This does not necessarily mean that you need to put all your money into stocks but you do need to put a good portion into them. Historically, the value of the stock market has always increased over the long-term. Therefore, as long as this trend continues in the future, you have a good shot of increasing the value of your portfolio substantially. Stocks have a greater potential for growth than other types of investments that are available. For example, bonds are another popular investment and they do not appreciate in value as much as stocks. Bonds are meant to provide steady interest income instead of capital appreciation. Since you are still young, you do not necessarily need the regular income that bonds provide. Instead, you are aiming for vast amounts of capital appreciation in your portfolio.

Stocks are generally considered to be a long-term investment. In order to fully realize the benefit of investing in stocks, you have to do it with a long term horizon. Since you are young, you have a long time to invest. Thus, making stocks the majority of your portfolio is generally a good investment decision.

Mutual Funds

In addition to investing in stocks, you might want to invest in mutual funds that invest in stocks as well. Many investors do not have the expertise that is necessary in order to choose individual stocks. When you invest in mutual funds, you are going to be able to take advantage of professional money management. The fund manager is going to be in charge of selecting the individual stocks for the fund. By doing this, you are going to be able to benefit from the capital appreciation of stocks, but you are not going to have to rely on your own ability to choose the companies that you invest in.

Changing Your Allocation

As you get older, you may want to change your asset allocation to integrate more bonds into your portfolio. However, now you need to focus on stocks and mutual funds that invest in them.