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Chapter 12. Managing Your Investments > Identifying the Right Mix of Securities... - Pg. 166

Managing Your Investments 166 Identifying the Right Mix of Securities in Your Portfolio The research on the right mix of securities in a portfolio is very broad, as you might expect, but a common theme emerges. Everyone has an opinion on how you should allocate your assets among stock and bonds, whether it is 50/50, 75/25, or any other combination. What you need to be con- cerned about is that you are basing your asset weighting not on someone's general theory of asset allocation but on what you need to achieve your goals. Let's learn more about asset allocation. Asset Allocation Asset allocation is a tool by which we reduce diversification risk by spreading assets into different classes. Typically, you will complete a questionnaire about your risk tolerance and time horizons and then look at a suggested portfolio of asset classes to appropriately allocate your assets among equities, bonds, and cash. Some asset allocation programs get really granular and subdivide into dozens of smaller asset classes. Savings Tip You might want to consider a simple rule of thumb that is often used in asset allocation. Subtract your age from 100 and invest the result in equities with the difference going into bonds. If you were 50 years old, you would subtract 50 from 100 and half of your investments would go into equities and half into bonds. A 30-year-old's portfolio would be 70 percent equity and 30 percent bonds, and so on.