Got $1K to Invest? Think Asset Allocation

If you've got $1,000 you're just itching to invest, I have two words for you: asset allocation.

Instead of immediately earmarking your cash for a specific purpose, it might be best to take a step back first and look at where you've got your money already.

Here's why: depending on your age and your risk tolerance, you might be best served to put that money to use in a certain place -- such as stocks, bonds or cash -- where you don't have as much money as you probably should.

That's where asset allocation comes in, because it's the concept of making sure your money is spread out among different types of investments that balance risk and reward in the way that's right for you.

Your own particular allocation will vary, mostly by age; if you're 25, you have a much longer time horizon in which to make up losses from risky investments (like if you would have invested in former high-fliers like Krispy Kreme ( KKD) or Crocs ( CROX) before their stock prices tumbled precipitously) than you do if you're 75.

Cramer: Crocs Is Over (Video, Aug. 6)

To watch the video, click the player below:

It will also vary by your risk tolerance, because even if you're young, if you can't stand to see your assets decline too much in value, you may want to invest more conservatively, weighting your assets toward such investments as Treasuries and funds with an emphasis on income and asset preservation. And, it may change based on any expected major life events, such as buying a house or having children.

It's always good to talk to your own personal financial adviser about this sort of thing, because every person's situation is going to be different, but here's an example.

Say you're 30 years old, and have all your money in a bank account and CDs. That $1,000 would almost certainly be best put into something that's a little bit riskier, but also over time almost certain to give you a higher return. The obvious choice would be stocks, or mutual funds or ETFs that own stocks. Maybe you would want to try the Vanguard 500 index Fund ( VFINX) (a collection of some of the largest U.S. companies in all sectors) or the Turner Small Cap Growth fund ( TSCEX), which invests in smaller publicly traded companies.

You could even try individual stocks that you like or think are set to rise, such as Apple ( AAPL), Bank of America ( BAC) or Sirius XM ( SIRI), but that's one of the riskiest moves of all, because your investment is totally dependent on the fortunes of one company.

(If you're really daring and savvy, you could try investing in options or derivatives, where there are big potential returns -- but the losses in those areas can be huge, so you want to make sure you know what you're doing before jumping in there.)

However, if you're 60 years old and have all your money in the stock market, it would be a good idea to take the edge off the risk in your portfolio, and invest in CDs or money-market accounts.

So, before you put your $1,000 anywhere, tally up your current savings and investments to figure out what you've got, and see where the gaps are. That could be as simple as looking at stocks vs. bonds, or it could mean looking within your stock portfolio to find where you're missing certain parts of the market. Do you have some large-company stocks and some small-company stocks? Do you have some exposure to international markets? Are you spread out across enough sectors of the economy?

"If you already own funds, you could use the $1,000 to shore up certain areas, such as international or small-cap, where you may not have as much money invested," says Roger Wohlner, a financial adviser at Asset Strategy Consultants in Arlington Heights, Ill.

You could look to target-date retirement funds for inspiration on the asset allocation. These funds are created with a specific retirement date in mind. So a fund with a target date of 2050 would be suited for someone retiring around the year 2050, who would have about 40 more years to work.

Check out some target-date funds to get an idea of what your asset balance should be (again, factoring in issues such as risk tolerance and life-event plans). You can look at funds like those from Fidelity, Vanguard and others.

"Shop around at different fund companies" when looking at the target-date fund allocations, Wohlner recommends. "They're different enough to where people should take a look at several" of the funds.

Some say these funds have been ramping up their risk levels in the pursuit of higher returns, but you can still get a general idea of what asset balance you'll want from looking at the funds that have a similar investing time horizon as you.

When you figure out what investment professionals have planned for people with similar risk profiles to yourself, that can go a long way toward helping you figure out where you're a little light in your overall investment strategy. Then, you'll know where to go to put that extra $1,000 to work.

For more information on asset allocation, check out this article on how to rebalance your portfolio, as well as this Web page from the Securities and Exchange Commission.

More from How-to

What Is Tom Brady's Net Worth?

What Is Tom Brady's Net Worth?

How to Be a Winner Like Legendary Former General Electric CEO Jack Welch

How to Be a Winner Like Legendary Former General Electric CEO Jack Welch

Watch This If You're Wondering How Much Gold to Have and When to Sell

Watch This If You're Wondering How Much Gold to Have and When to Sell

How to Calculate Cost of Goods Sold for Your Business

How to Calculate Cost of Goods Sold for Your Business

How Much Money Has Bill Gates Made Over Time?

How Much Money Has Bill Gates Made Over Time?