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If you’ve already started investing, the hard part is over. Asset allocation is the way you spread your money across various classes of investments including stocks, bonds, and cash reserves. According to Markowitz' 1990 Nobel Prize winning theory, almost 92% of your investment returns depend on how your assets are allocated among the different classes, while only about 2% is due to the actual stocks and bonds you choose to buy (for example, choosing General Motors instead of Ford, or Texaco instead of Mobil).
Women tend to be too conservative in their investment decisions, with the majority worrying that they haven’t saved enough for retirement. One of the biggest risks is deciding not to do anything or being too conservative in your investment strategy.
Since the beginning of the 19th century, stocks have beaten the returns of other investments by a large margin. But to realize that advantage you must be able to invest for five years or more. While past performance is no guarantee of future results, based on the Standard & Poors 500 (an unmanaged index), since 1925, the chances of losing money over one year is 28%, over five years is 10%, over 10 years is 3% and over 20 years is 0%.
So if you’re 10-20 years away from retirement, consider investing primarily in stocks and growth mutual funds. When you’re 5-10 years away from retirement, rebalance with a greater emphasis on bonds and income-producing equities like utilities. They tend to provide a steady income on your investment and may be less risky as you draw closer to retirement.
Diversification means your money is spread among a number of different investments so your return isn't dependent on any single investment. No single type of investment performs well all the time. In fact, each tends to follow its own cycle. Within your asset allocation, you should diversify the investments within each asset class. You should consult a Financial Advisor about what mix is right for you.
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Here are some examples of just a few of the many ways to diversify your investments. These examples are provided for information purposes only and do not represent a specific recommendation.
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