The Asset Allocation Fund: One Stop Shopping

Asset Allocation funds can be described many ways but summed up in one word… Versatility. Many balanced funds that exist are going to keep a fairly fixed mixed of stock and bonds either in ratio (3:2) or percentage (60 percent stocks and 40% bonds). But an asset allocation fund will move money between asset classes so as to maximize profit potential. For instance, if bonds are climbing the fund manager may decide to invest more there and pull existing money from stocks to invest in bonds. The same goes in reverse. This allows flexibility and speed when managing money.

What will determine what kind of fund is for you is how much you can invest, how much you have liquid after you invest, how much risk you can handle, your investment time frame and your age. When considering these types of funds, the benefit is that they are one investment that can perform like several. By purchasing shares in one fund, the investor is essentially investing in several types of classes because of the internal diversification. This may help them obtain a more consistent return curve. The idea however of investing in one fund seems a bit like putting all your eggs in one basket. If you thought this, you are certainly right. However, an allocation fund may be a great way to round out ones portfolio rather than sell the bad stuff to buy the good stuff. The fund managers watch the markets and see where to move your money.

Each fund that does this will vary in composition and opportunity. Be sure to get a prospectus from your fund broker or financial adviser about whatever fund you are considering. It will show you their objective goals, how they buy and sell investments, and some snap shots of their previous years returns. Use this information to make good decisions about your money keeping in mind that what worked last year for them might not work this year! Markets change and your portfolio should as well to adjust for current and future needs.

As stated above, another fund type you can certainly look into is balanced funds but funds like a life-cycle or target date fund. These often will be more conservative in the fact that they start out with a mix of higher risk stocks, bonds and cash but move into more conservative investments as you get older or get closer to the fund target date. The idea being that the younger you are the more you can risk because you have a whole working life to make up potential losses. The older you are the less time you have to earn back losses.

So however you decide to invest, decide wisely. That means do your homework! Seek advice but do not just arbitrarily accept that advice. It is your money. Don’t do anything you feel uncomfortable with. Look into whatever is suggested to you, weigh the pros and cons, and you will come out on top.

Learn more about asset allocation funds. Stop by Jonathan Silvers’s site where you can find out all about asset allocation mutual funds and what they can do for you.