Asset allocation refers to the process of determining how much of your savings and investments should be in safe investments verses in riskier investments.
Traditional Asset Allocation
In traditional terms, asset allocation is a process which helps you determine how much of your money should be in three major asset classes: cash, fixed income (bonds), and equities (stocks).
More advanced asset allocation strategies also look at the amount of money you may have in other investments like real estate, commodities or collectibles.
Investment managers and financial planners will usually follow either a strategic asset allocation process or a tactical asset allocation process. You should understand the difference.
To put together your own asset allocation read:
How Much of My Money Should Be In Stocks vs. Bonds
Or, for an online asset allocation calculator try:
Smartmoney's One Asset Allocation System
Asset Allocation In Retirement Needs To Be Different
Remember, as you near retirement, a new way of looking at asset allocation needs to emerge; an asset allocation model that focuses on ways to maximize your lifetime income.
Such an asset allocation model would look at the amount of investments you have that could produce guaranteed income that would be available to meet essential expenses. Then it would look at investments that produce variable income that would be available to meet non-essential expenses.
This new type of asset allocation model specifically for retirees is currently being designed by the Retirement Income Industry Association and is covered briefly in 3 Ways To Construct Your Retirement Asset Allocation.
