RISK AND RETURN
To “balance” your portfolio’s risk and return, an investor should consider allocating their portfolio among three main asset classes—stocks, bonds, and cash or stable value investments.
To determine the appropriate allocation to stocks, a good guideline is to subtract your age from 110. The answer, or result, is the percent of your portfolio that should be allocated to stocks. For example, a 40-year-old investor should have approximately 70% stock allocation (110 - 40 = 70). By following this guideline, an investor reduces their risk as retirement nears.
• Risk measures how safe your investment is. • Return is the growth of your investment. • Inflation may take a bite out of your retirement savings as it reduces the buying power of your money.
High
Aggressive Allocation 0% Bond/100% Stock
Growth and Income Allocation 30% Bond/70% Stock
Balanced Allocation 50% Bond/50% Stock
= Bond = Stock
Income Allocation 70% Bond/30% Stock
Low
RISK
Low
High
By maintaining an allocation to stocks in retirement, an investor reduces the impact of inflation on the purchasing power of their savings.
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