What is asset allocation? The process of distributing investments across various asset classes (types of investments) in an attempt to moderate the inevitable ups and downs of the market. While fixed investments (fixed annuities, bond funds, money market funds, and the like) remain steady (investors can generally expect a 3 to 5 percent annual return), mutual funds tied to the stock market (which are known as equities) fluctuate, especially over short periods of time (less than five years).   Market fluctuation tends to smooth out over time. From January 1970 to December 2003, for example, the average annual compounded rate of return for the S&P 500 was better than 11 percent (minus fees and taxes). However, over this same period the S&P 500 fluctuated wildly. One year the S&P 500 dropped by 39 percent; another year it soared by 64 percent. For this reason, it is important that investors have a mix of investments (fixed and equities) that are appropriate to their risk tolerance. A very general rule of thumb is that investors have an allocation of fixed investments that match their age. For example, a 40-year-old might have 40 percent of their portfolio allocated toward fixed investments, and 60 percent allocated toward equities. Asset allocation is also referred to as diversification. In plain English it simply means don't put all of your eggs in one basket.   Assembling a properly allocated portfolio can be a challenge, especially for those who are new to investing. Vendor agents and individual financial professionals can help investors properly allocate their portfolios. Cost for this service may be built into the product, and will vary by agent and financial professional.   Another approach to asset allocation is to purchase a static, preallocated mutual fund. This type of mutual fund is available in a variety of allocations. For example, one fund may be split 60 percent equities, and 40 percent fixed investments, while another fund may be split 40 percent equities, and 60 percent fixed investments. Numerous mixes exist. Rules of operation and costs vary by vendor.   A simple, relatively new approach to ensuring proper allocation over time is to invest in a Target Date Retirement Fund. Here an investor chooses an estimated retirement date, say in the year 2023, and then picks a Target Date Retirement Fund that most closely corresponds to that date (for example, a 2025 fund). The longer the time until retirement, the more weighted the mutual fund is toward equities. As the target retirement date approaches, the fund automatically becomes more weighted toward fixed investments. The investor does not have to make any changes to the fund. All allocation changes are made by the fund operators. When the target date is reached, the fund remains open for about five years; during that period the fund gradually reduces its equity exposure until its investment mix mirrors that of a typical static retirement fund (generally 80 percent fixed investments and 20 percent equities). Rules of operation and costs vary by vendor.   next question    back to investment questions view 403(b) questions    view 457(b) questions					403(b) Vendor List 457(b) Vendor List Savings Calculator Savings Distribution Calculator 403(b) Questions 457(b) Questions Investment Questions District Contacts Daryl DiZenzo Payroll/Benefits Accountant 203.594.4016 Mike Lagas Business Manager 203.594.4014 more resources