Pick Your Investments

It's decision time! If you've read through Steps 1 and 2 and up to this point in Step 3, you're ready to begin thinking about how to select the investments that will make up your retirement portfolio.

First, set up your asset allocation. That means figure out approximately what percentage of your money you want in stocks, bonds, and/or short-term investments. Use the pies in the "Reducing Risk Through Diversification" section and the investment objectives table in the "Putting Some Class into Your Investment Objective" section as a rough guide. Also, you may want to review the section on "Investment Risk".

To maximize the benefits of diversification in your portfolio, consider mixing funds that represent a range of asset classes, including stock, fixed income and cash equivalents. Of course, the specific amounts you invest in each asset class will depend on your goals. (For example, a person who is 30 years away from retirement will probably have more high-risk potential/ high-return investments in their portfolio than a person who is just five to ten years from retirement.) Including funds in a variety of asset classes will give you varying levels of risk and potential return, and this can help make your overall portfolio's performance less volatile. And when you diversify this way, you improve your ability to weather short-term market ups and downs... and you'll worry less about the performance of any single investment. Study your plan's investment choices and then select a combination of funds to create your asset allocation "pie". You may still need some help reviewing your plan's investment choices.

Once you've established an investment strategy and created a long-term portfolio, it doesn't take much effort to keep your strategy heading in the right direction. In fact, maintaining your portfolio is sort of like maintaining your car. Most of the time your car hums along just fine. At regular intervals you ask a mechanic to do some routine maintenance. And every so often, you switch to a new model-something that better suits your changing needs.

Just remember, every time your life changes, your financial priorities are affected in some way. And even small shifts in your financial picture can signal that it may be time to review your plan.