It's
not enough that your asset allocation plan makes sense
given your age and your financial goals. It also has to
be comfortable, to feel right. If changes in the value
of your portfolio are keeping you awake at night, then
you might want to consider shifting to a more conservative
asset allocation with a greater emphasis on less volatile,
fixed-income securities, such as high-quality bonds. On
the other hand, if you're a risk taker by nature, you may
be comfortable allocating most of your portfolio to volatile
investments that have a good chance of increasing in value
in the long run.
Your risk tolerance stems from a variety of things, including
your age, personality, personal experience, and financial
circumstances. For example, if you're approaching retirement,
have burdensome financial responsibilities, or have lived
through major economic upheaval, such as a massive recession
or currency devaluation, chances are you may be a more
risk-averse, or conservative, investor.
On the other hand, if you're young, earn a high income,
have few financial responsibilities, and have seen little
in the way of economic hardship, you might be inclined
to take more risk.
Most experts agree that you should take as much risk as
you're comfortable with — and that makes sense given
your age and your financial goals. But taking risk doesn't
mean putting all of your money into highly speculative
investments. What it does mean is allocating as much of
your portfolio as possible for long-term growth — in
investments such as stocks, stock mutual funds, and options.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
Roger
Ibbotson explains how time can be your best investing
ally.
Volatility poses
the biggest investment risk over the short term. But
if you can wait out downturns in the market, chances
are the value of a diversified portfolio will rebound.
In fact, over historical periods of 20 years or more,
stocks — usually the most volatile investments
over the short term — have always increased in
value.
It's
not enough that your asset allocation plan makes sense
given your age and your financial goals. It also has to
be comfortable, to feel right. If changes in the value
of your portfolio are keeping you awake at night, then
you might want to consider shifting to a more conservative
asset allocation with a greater emphasis on less volatile,
fixed-income securities, such as high-quality bonds. On
the other hand, if you're a risk taker by nature, you may
be comfortable allocating most of your portfolio to volatile
investments that have a good chance of increasing in value
in the long run. 
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates 