Your investment choices are divided into three asset classes — stock funds, bond funds and cash alternatives. Asset allocation means choosing from each to create a portfolio that matches your risk tolerance (conservative to aggressive) and time horizon (how long until you need the money).
Consider selecting a variety of funds within each class. For example, some stock funds are designed to provide returns based on the financial performance of the companies that make up the fund. Others may have an objective to provide dividends as the main source of investment returns.
Mixing your investments among the different types of stock funds might help smooth out bumps in the market over the long term. This is diversification.
Over time, your portfolio may become too conservative or aggressive because of market fluctuations. Rebalancing lets you bring your asset allocation back in line with your investment strategy.
See if your plan offers an automatic rebalancing option, which allows you to choose a rebalancing frequency and rebalances your account for you.
Understanding these principles and how they work together can help set you up for success.
Asset allocation, diversification and rebalancing do not ensure a profit and do not protect against loss in declining markets.
This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.