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Asset Allocation Best Practices Change During Your Lifetime

There are best practices everyone should adhere to when allocating investments. Many people just starting out are resistant to setting aside anything - their belief is that they'll make more money later and that they can't spare a dime right now. Often paying off student loans and setting up a new life are looming overhead.

The easiest way to begin is if your company is offering a 401(k) program. You can have as little as 1% automatically deducted from your paycheck and increase it by 1% every few months and see your returns and savings grow. It's a small amount but a huge investment in your future and absolutely worth it. Many companies also match your 401(k) investment (read: free money).

When you're young and just starting to invest, you have time on your side and you can afford to have your asset allocation on the riskier side. If there are drastic market declines like we have seen twice in the past 12 years, you still have time to recover from those declines and benefit in being invested for the long run.

When you're older and eyeing retirement, you should take less risk with your investments. Over the past 12 years many people near retirement learned the hard way when the value of their retirement account(s) drastically declined. Perhaps they'd stayed in riskier investments such as stocks because they'd either seen strong returns or unfortunately, were not proactive enough to move to safer investments when their assets needed to be moved into more conservative holdings.

Because of the declines in the market, they were unable to retire when planned. Market declines combined with very low CD rates and savings account rates made it impossible for many people to retire. The best savings rates and bank CD rates are around 1.00 percent these days, below the rate of inflation.

There are many tools available to you to help you with your asset allocation during your lifetime. There are also age-based asset allocation models and most of them recommend higher exposure to stocks and mutual funds earlier in life.

Oppenheimer Funds offer a very useful Asset Allocation Worksheet you can use to help you decide how to allocate your investment portfolio. You're asked a series of questions including your investment objectives, what types of investments you currently have, your investment risk tolerance, your investment time frame, as well as a few more questions.

After you submit your questionnaire you are immediately given your results based on your answers. You can use this worksheet as a guide for your investments or discuss the results with your financial adviser.

There are also asset allocation calculators available that work in a similar way as the spreadsheet. Bankrate offers a useful Asset Allocation Retirement Calculator.

The key to a successfully planned retirement is to plan for retirement now. The sooner you start, the closer you will be to meeting your retirement goals. Starting is half the battle - you have to proactively stay on top of your retirement accounts. Checking on investment returns and making sure you're on track for the retirement you want at the age you want is how to stay the course for a comfortable retirement.

Author: Lisa Graham
January 24th, 2013