Making Sense Of Allocation

If you own mutual funds, chances are you have heard a lot about asset allocation. Chances also may be that you don’t do very much to practice it.

The term itself is obscure and off-putting, the sort of thing actuaries discuss in office cubicles. Real people don’t want to asset-allocate, they want to make money on their investments without taking too much risk.

But that latter statement pretty well defines what asset allocation is. It’s a commonly used system, nowhere near as complicated as it may sound, for trying to manage your money well.

The idea is to spread your money among different types of investments to satisfy your personal needs, goals, preferences and circumstances. The usual categories are stocks, bonds and money-market securities.

You put some money in stock funds not because your neighbor thinks the market is going through the roof, but because you need your nest egg to grow if you’re going to pay for your kids’ college and have enough left over to consider retiring.

You put some money in bond or money-market funds because the stock market might go through the floor instead of the roof.

Picking the right mixture of fund types, and good individual funds of each type, is where the mission requires some work and expertise. Many people pay a planner, broker or other adviser to make these choices for them, but it can be done on your own if you have the time and the inclination. A few folks even consider it fun.

“It isn’t mysterious,” says Lori Lucas, a vice president at the financial consulting firm of Ibbotson Associates.

Lucas suggests picturing your endeavor as analogous to running a concession stand at a beach resort. If you carry only sun-block lotion, you will do well in fair weather but miserably when clouds appear. If you add sunglasses, you may do even better on good days, but still go broke when it rains.

But stock some umbrellas, too, and you should be prepared for any eventuality. The aim is to diversify and allocate your assets in proportion to your goals and the risks you are willing to take.

Once you work out a plan, you stick with it, adjusting the formula occasionally as you track your progress, but resisting the impulse to rearrange everything each time the wind shifts.