Allocate Your Assets Like a Pro

In other words, the golden rule of asset allocation is that when you've got more time until your goal, you can afford to have more risk (such as equities) in your portfolio. Since the stock market has historically made money over time, you're less likely to be adversely affected by a negative downturn if you've got the time to ride it out.

As a new member of the workforce, it's not really that crazy to have a retirement account that's entirely made up of stocks. If you're 58, however, and you're starting to seriously consider retiring, you might want an asset allocation weighted more toward lower-risk investments such as bonds.

That doesn't mean that you should convert to 100% cash by the time you reach your goal-time (whatever and whenever it happens to be). You've also got to consider your drawdown horizon -- the time over which you expect to take the money out. For instance, if you're saving for your kids' college fund, you're probably looking at a drawdown horizon of four years. Those are four years when your money -- or at least part of it -- can still grow.

Building Your Portfolio

Now that you understand the biggest part of asset allocation -- how your portfolio should be weighted as you approach your investment goal -- it's time to think about how to build that portfolio.