“Asset allocation funds offer diversified investment options based on risk tolerance, and typically include a mix of investments including stocks and bonds,” says Eric Jacobson, a Thrivent financial consultant in Rothschild, Wisconsin. These funds also may be diversified geographically in different regions globally.
How do asset allocation funds work?
Asset allocation funds are managed by professional fund managers who select and make periodic adjustments to investment holdings within a fund. People select funds that are most suitable for their investment strategy based on the risk in the asset allocation funds, Jacobson says. Asset allocation funds can be used in traditional individual retirement accounts (IRAs), Roth IRAs, 403(b)s or individual and joint accounts.
Why should I consider having asset allocation funds in my portfolio?
According to Jacobson, “Asset management funds act much like a GPS in your car, and they’re periodically adjusted to keep investors moving toward their investment destination.” Asset allocation funds are a core position for many people as they provide diversification and a potential way to minimize their risk burden. Diversification can help reduce risk but does not eliminate it; it does not ensure a profit or protect against loss in a declining market.
How do asset allocation funds differ based on risk tolerance?
The more aggressive the asset allocation funds, the higher percentage of stock funds or similar higher risk investments are held in the portfolio, while less aggressive funds feature a higher percentage of bonds, or lower risk investments, Jacobson says. Regardless of the level of risk, allocation funds should stay true to their design. An aggressive fund will stick with that strategy, so investors know what they’re getting.
How can a person shift between asset allocation funds as their risk tolerance changes?
Investors can work with their financial advisor to move to a more conservative asset allocation fund to potentially lower their risk as their risk tolerance changes or they near retirement, Jacobson says.
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