Different asset mixes meet different needs
Finding your asset mix
Choosing investments isn't a one-size-fits-all kind of thing. However, there are certain broad principles that apply to picking an asset mix.
Your asset mix should align with your personal situation: how much time you have until you'll need the money, and how much risk you can take and still sleep at night.
Target Enrollment Portfolios can meet these needs because they're based on your risk level and the year your beneficiary is expected to enroll in school.
Here's how these pieces of information are used to create an asset mix.
1. When do you need the money?
If you are not planning on using your savings until your beneficiary enters college, you might have many years to let your money compound—and to ride out any temporary downturns in your account balance. So you can afford to take on a little more risk in the hopes of getting higher returns.
But if you're starting to save when your beneficiary is already in high school, you won't have much time to wait for the market to bounce back if it should hit a rough patch. You also won't have as much time to benefit from compounding. In this case, you might be better off in an asset mix with lower risk.
2. How much risk are you comfortable with?
Some people can easily ignore day-to-day changes in account balance that sometimes come with more aggressive investments. Instead, they focus on their overall progress toward their goal. Others may stay awake at night fretting about what their investments will do tomorrow.
It won't do you any good to constantly worry over your investment decisions, and it probably won't be much fun either. So choose only a level of risk you know you can stand.
Usually refers to investment risk, which is a measure of how likely it is that you could lose money in an investment. However, there are other types of risk when it comes to investing.
The way your account is divided among different asset classes, including stock, bond, and short-term or "cash" investments.
The profit you get from investing money. Over time, this profit is based mainly on the amount of risk associated with the investment. So, for example, less-risky investments like certificates of deposit (CDs) or savings accounts generally earn a low rate of return, and higher-risk investments like stocks generally earn a higher rate of return.
When earnings on invested money generate their own earnings. For example, if you invested $5,000 and earned 6% a year, in the first year you'd earn $300 ($5,000 x 0.06), in the second year you'd earn $318 ($5,300 x 0.06), in the third year you'd earn $337.08 ($5,618 x 0.06), and so on. Over longer periods of time, compounding becomes very powerful. In the example above, you'd earn over $800 in the 18th year.
Putting it together
Having a mix of investments helps lower the overall risk in your portfolio because the different asset types usually perform differently at any one time. This helps protect your portfolio.
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All investing is subject to risk, including the possible loss of the money you invest.
Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.