Asset Allocation
Now that you've been introduced to the different asset classes, how do they fit together? And which one should you invest in?
Your decision should really be based on your goals, your time horizon and your risk tolerance, but remember you are not restricted to investing in only one asset class.
Think about your wardrobe - you have t-shirts for warmer days, sweaters for cooler days and coats for the winter. If you only had t-shirts, you would freeze in December. The point is that your wardrobe is diversified and your investments can be, too. You can rely on different parts of your portfolio to perform better at different times.
Numerous studies have shown that over 80% of long-term portfolio performance comes from having the right asset mix - and sticking with it. That means that other factors, like picking the right individual mutual funds or stocks, are less critical than making the right asset allocation decisions. Spending some time to determine your appropriate asset mix is a valuable exercise, before you begin to select individual mutual funds or stocks.
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