Learning the basics of investing can help you become a better investor — and can lead to smarter choices.
Asset allocation
Your investment choices are divided into three general asset classes — stocks, bonds and cash alternatives. Asset allocation simply means choosing from these asset classes to create an investment portfolio that matches both your time frame and risk tolerance, ranging from conservative to aggressive.
Asset classes at a glance:
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Stocks — Stock, which is a share in the ownership of a company, represents a claim on the company’s assets and earnings. Depending on your risk tolerance and time horizon, you may want to consider stocks in your portfolio.
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Bonds — When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other issuing entity. In return, you earn a specified rate of interest when it matures or comes due. Bonds can provide balance to an account made up mostly of stocks and may boost the earning potential of an account made up mostly of cash alternatives.
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Cash alternatives — Cash alternatives are considered highly liquid because you can generally convert them into cash quickly. Some of the most common examples include savings accounts, money market deposit accounts and money market funds. You may want to consider a portfolio with more cash alternatives if you don’t want to take a lot of risks, or need a high return or if you are closer to retirement.
Diversification
Mixing your investments among the different types of asset classes might help account for the long-term ups and downs of the market. Consider selecting a variety of funds from each class.
Rebalancing
Over time, your portfolio may become too conservative or aggressive because of market conditions, your investment needs or your investing time frame. Rebalancing is simply adjusting your asset allocation to align with your evolving investment strategy. See if your plan offers an automatic rebalancing option that allows you to select a rebalancing frequency and that adjusts your account for you.