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How to Find Your
Perfect Asset Allocation
The savvy online investor manages her investment
portfolio by allocating assets.
Asset allocation and diversification help you spread your
risk across various types
of online investments. You can calculate how much risk
you can tolerate
and select a blend of investments to give you the highest
return for that risk.
Or, you can take a return-based approach that measures
how much return you need
to meet your goal and design a portfolio that can get you
there.
Picking an asset
allocation based on your risk tolerance
If you’re like most investors, the disappointment you
feel when your portfolio falls
more than you’d like is definitely greater than any
happiness you might feel at eking out
a slightly better-than-expected return. That’s why online
tools that assess your appetite for risk, and then design a portfolio, make
sense for many investors.
IFA.com: Take
the Index Fund Advisors offer a Risk Capacity Survey to determine
what kind of
investor you are.
After you answer the questions, the Web site suggests one of
several portfolios.
Vanguard’s
Investor Questionnaire: The Vanguard
questionnaire asks you ten questions
in an attempt to determine how much risk you can stomach.
At the end, the site recommends that you own certain mixes of short-term
reserves, stocks, and cash.
CNNMoney: CNNMoney
steps you through four questions designed to figure out
what kind of risk taker you are. It then generates a
fairly basic asset allocation mix.
Asset-Analysis: This
site steps you through five questions that measure your appetite for risk. When
you’re done, the site determines how much risk you can take and tells you how
much
of your portfolio should be invested in cash, bonds,
emerging markets, domestic stocks,
real estate, and international stocks.
Picking an asset
allocation based on your goals
The other way to figure out how to allocate your
portfolio is to first determine what kind of rate of return you need to reach
your goal and then pick an asset allocation designed to get you there.
*TIAA CREF’s Asset
Allocation Evaluator: If you want to
determine your allocation
on a specific goal, such as saving for college, this is a
good tool for you.
The first question it asks is what you’re saving for,
such as retirement, education, or a first home.
The site then asks you additional questions that are
relevant to that specific goal.
*Fidelity.com’s
Portfolio Review: Use this tool to
help you plan for a wide array of goals,
ranging from retirement and education to more specific
things like a vacation, wedding,
or wealth accumulation. The Portfolio Review also studies
how much risk you can stomach.
The site can analyze your current portfolio and make
suggestions on ways to improve
and suggest an asset allocation. You don’t have to be a
Fidelity account holder to use the system; you can sign up for a free
membership instead.
*Morningstar’s
Asset Allocator: The Asset Allocator
examines your financial goals
and helps you choose the blend of cash, stocks, and bonds
that will make it happen.
The tool isn’t free, though, so you’ll have to pony up
for a subscription to Morningstar Premium, which costs $189 a year. A free 14-day
trial is available.
*American
Century Investment Planner: This
planner starts by asking you what you’re saving for and then goes further to make
suggestions. You need to register to use the site;
however, you don’t need to have an account.
Some brokers and mutual fund companies provide asset
allocation tools to their customers. Mutual fund company T. Rowe Price, for
instance, offers tools that analyze your portfolio
and generate asset allocations to customers
http://www.dummies.com/how-to/content/how-to-find-your-perfect-asset-allocation.html
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