Asset allocation: Not as complicated as it sounds. Or is it?

Ever heard of a little something called asset allocation? Yes, it’s a mouthful. In plain talk, it’s how you divide your money when you invest it. Let’s start with the basics.

Depending on your age, and your comfort level with trading, you’ll be able to decide how to mix your assets among stocks, bonds and cash. Moolanomy outlines five investment profiles and ways to decide which one suits you. Still not sure what types of investments fit you best? Allocation tools, like ShareBuilder’s PortfolioBuilder, assess your comfort level with different types of investments based upon your time horizon and financial goals. And regardless of what you’re putting the moolah aside for, it’s important to know how you really feel about risk and reward—and how much money you have to contribute.

Investor Profile: We profiled a “20 something” young professional with a household income under $50,000. This will be her first time investing, and she has limited knowledge on how and where to do so. Sound like someone you know? She feels ready to invest in both stocks and bonds. Her household has a net worth of under $25,000 and a tax rate of 25%. With the goal of saving for at least a 20% down payment for a house, she’ll be using her investment account to save for the big plunge in the next 5 years. Our young investor will be spending all of her investments on the down payment when she buys the house. Since she’s young, she feels that she can take more risks. But she’s still concerned with the thought of losing money in the market – and would much rather invest in less risky ways with a few higher risk investments mixed in. With all of these factors combined, by Moolonamy’s definition, she’s a “Capital Preservationist.”

This investor profile won’t give you all the investments answers. But it’s a beginning, especially if you’ve avoided the market all these years for fear of looking dumb or losing money. So where do you go from here? Set a goal. Are you looking down the road to retirement or to buying a new house in the next few years? This can greatly affect your allocation and the level of risk in investments. Assess your comfort level. And do research. Don’t take anyone’s word for it. Only invest your money in ways that make you feel comfortable and confident.

Tags: Investing, portfolio, Stocks