why is asset allocation important 
there s no formula for the right asset allocation for everyone but the consensus among most financial professionals is that asset allocation is one of the most important decisions investors make 1 selecting individual securities within an asset class is done only after you decide how to divide your investments among stocks bonds and cash and cash equivalents this will largely determine your investment results investors use different asset allocations for distinct goals someone saving to buy a new car in the next year might invest those savings in a conservative mix of cash certificates of deposit and short term bonds however individuals saving for retirement decades away typically invest most of their retirement accounts in stocks because they have a lot of time to ride out the market s short term fluctuations risk tolerance plays a key factor as well those uncomfortable investing in stocks may put their money in a more conservative asset class despite having a long term investment horizon age based asset allocationfinancial advisors generally recommend holding stocks for five years or longer cash and money market accounts are appropriate for goals less than a year away bonds fall somewhere in between financial advisors once recommended subtracting an investor s age from 100 to determine what percentage should be invested in stocks a 40 year old would therefore be 60 invested in stocks variations of this rule recommend subtracting age from 110 or 120 given that average life expectancy continues to grow 2 portfolios should generally move to a more conservative asset allocation to help lower risk as individuals approach retirement 2asset allocation through life cycle fundssome asset allocation mutual funds are known as life cycle or target date funds they set out to provide investors with portfolios that address their age risk appetite and investment goals with the correlated parts of different asset classes critics of this approach point out that a standardized solution for allocating portfolio assets is wrongheaded because individual investors require individual solutions 3these funds gradually reduce the risk in their portfolios as they near the target date cutting riskier stocks and adding safer bonds to preserve the nest egg the vanguard target retirement 2030 is an example of a target date fund the vanguard 2030 fund is for people expecting to retire just before or after 2030 as of aug 31 2023 its portfolio comprises 63 stocks 36 bonds and 1 short term reserves this asset allocation was achieved by investing in the following four funds 