Deciding how much of your retirement savings to invest in stocks, bonds or cash can make a big difference in your retirement account balance over time. In fact, studies show that asset allocation is responsible for over 90% of a portfolio’s performance.*
How Asset Allocation Works
Investments in the different asset classes tend to react to changing markets in different ways. For example, when stocks are up, bonds might be down. Because gains in one type of investment may offset a decline in another, investing in a combination of asset classes can help reduce your overall risk and increase your potential returns.
Factors Affecting Portfolio Performance
How money is allocated among asset classes can be more significant to performance than the selection of individual investments within an asset class.
A study on the performance results of some of the nation’s largest pension funds found that 93.6% of the variation in total plan returns can be explained by asset allocation.
*Source: “Determinants of Portfolio Performance,” by Brinson, Hood and Beebower. Updated in Financial Analysts Journal, may/June 1991.
*Example is hypothetical and does not predict the future performance of any investment option available in your employer’s retirement plan. Example assumes weekly before-tax contributions of $24.03 earning hypothetical 4%, 6%, 8%, and 10% annual returns over 30 years. Actual returns and principal values will fluctuate.
Stocks fluctuate in value and are subject to more risk than bonds or money market investments. Shares, when redeemed, may be worth more or less than their original cost.
Bonds, if held to maturity, provide a fixed rate of return and a fixed principal value. Bonds will fluctuate and shares, when redeemed, may be worth more or less than their original cost.
Finding the Right Fit
Your personal asset allocation strategy depends on your retirement savings goals, your tolerance for investment risk, and how long you have before you’ll need to use your savings. Developing an appropriate asset allocation strategy is a critical component of a sound investment plan for retirement. Once you determine your strategy, it’s best to stick with it over the long term, riding out the ups and downs of the stock market.
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