Asset allocation simply means spreading your investments among the three major asset classes: stocks, bonds and cash investments. Asset allocation can be the single most important factor in achieving investment success.

What’s the best asset allocation?
The key to investing for any long-term goal is to have a well-diversified investment portfolio to help maximize return and manage risk. It is especially important for college savers to manage risk as their children approach college age. No single asset allocation works for everyone or every situation. Keep in mind this rule: you almost certainly will need to hold a mix of stock, bond and cash investments to achieve your financial goals. To help you decide what allocation is best for you, consider these factors:

Time horizon. How many years do you have until your child goes to college? The more time you have until you’ll need your money, the greater your ability to weather short-term declines in the prices of your holdings. So if your time horizon is at least ten years, emphasizing stocks in your investment program may help you achieve your financial goals more readily.

Risk tolerance. How comfortable are you with risk? If you worry whenever the stock market takes a dive, you may have too high a percentage of stocks in your portfolio. While you probably need to hold some stock investments to help you achieve your long-term goals, balance them with enough bond and cash investments so you can sleep at night even when markets are volatile. Develop an investment plan you can stick with through thick and thin. To help you determine your risk tolerance, follow the link at left to our Risk Tolerance Questionnaire.

Your college savings goals. What are your savings goals when it comes to college expenses? Are you trying to pay tuition for four years for each of your children? For two years? What will college cost – how much should you be trying to save? Follow the College Cost Calculator link at left to get started.

Different types of investment options don't usually rise and fall at the same time; in some years, when stocks are down, bonds are up; in other years the opposite is true. By spreading your money among different asset categories, you can enjoy the potential long term gains of the market, while compensating for the inevitable stock downturns. In addition, various types of stocks can experience cycles during which they do better or worse than the overall stock market. Those periods can last for several years. You can reduce this risk by making sure your stock investments cover small, medium-size and la companies, as well as growth and value companies.

Ready-made portfolios
Ready-made portfolios are another option for employing asset allocation strategies without doing the allocating yourself. Balanced funds typically offer a combination of stock and bond holdings, while “life cycle,” or “age-based,” funds employ a combination of stock, bond and cash holdings that are automatically rebalanced over time to meet the asset allocation needs of the beneficiary based on his or her age.

Ready-made portfolios can be a simple way to execute your asset allocation strategy. They can help overcome one big obstacle to developing a long-term investment program: overwhelming choice. Studies have found investors can be so intimidated by the many mutual fund choices available that they put off investing entirely. Or they spread assets across numerous funds, which can raise the complexity of managing their portfolio.