Background. In this article, the author reviews the steps an investor should take to make sound asset allocation decisions and offers guidelines on assembling a portfolio that helps meet the investor’s needs.
Conclusions. The most important decision in structuring a broadly diversified investment portfolio is the allocation among and within the three major asset classes: stocks, bonds and short-term reserves. In selecting the appropriate mix, the investor should weigh four interrelated factors—investment objective, time horizon, risk tolerance and personal financial situation.
Practice Implications. A well-diversified investment portfolio and a disciplined savings program are important factors in reaching financial goals.
