Best Asset Allocation Strategies For Retirement Plans We've all heard the saying "don't put all your eggs in one basket." Asset allocation, or diversification, is simply the spreading around of your eggs into several different baskets. This spreads around the risk of loss to several different investments, cushioning your retirement account should one of those investments have a major decline. Over the course of time, asset allocation has more of an effect on your portfolio's performance than any other factor.

If you must still put all of your retirement funds in one type of investment (stocks, bonds, funds, etc.), at least diversify within that investment vehicle to spread your risk around. For example, instead of selecting just a growth mutual fund, you could split your investment into one bond fund, one growth fund, and a stock fund.

Your ideal goal is for your retirement account to grow fast enough to outrun inflation while still providing enough income for your retirement needs. There are three different goals you can have for your investment portfolio: liquidity, income, and growth.

Liquidity: This is how much of your portfolio is readily accessible as cash or can be quickly liquidated to cash.

Income: The amount of interest or dividends earned by the account's assets. A decent flow of income is necessary for those who expect to be continually drawing on their retirement account, such as those already in retirement. Growth: A growth-based portfolio would include stocks or funds that are projected to gain significantly in value between now and retirement. This requires some time between now and a large expected financial need such as retirement or the purchase of a new home.

Of course, there is no solution that is right for everyone. What is best in each specific situation depends on the individual's needs and tolerance to risk. There are three different types of risk profiles: aggressive, moderate, and conservative.

Aggressive: This is the riskiest type of investor, who is intent on gaining the maximum growth for their portfolio, usually through a high concentration of stocks or stock funds. This level of risk is more acceptable the longer you have until retirement age. This gives your investments more time to ride out any extreme highs or lows.

Moderate: As retirement age draws nearer, it is usually advisable to switch to a portfolio with a moderate risk. This is usually accomplished by switching from high-risk stocks to lower-risk mutual funds or bonds. Conservative: Money market funds, government bonds, and low-risk stocks that pay large dividends can be good conservative investment choices for those entering retirement. Once you have set your initial asset allocation, you should review it periodically with your financial advisor to make sure it is still serving your needs. In addition to these regular reviews, significant financial transactions or life events may require a reallocation of your retirement account. Some of these events include getting married or divorced, nearing retirement age, or coming into a large inheritance.

Depending on how far out of balance your portfolio has become, there are two different ways to change the asset allocation. If it is only slightly out of balance, simply changing the allocation of your future contributions may be enough to even things out. More drastic adjustments may require the transfer of funds between existing assets. If the funds to be moved are held in stocks, mutual funds, or other securities, then they must be liquidated before any money can be reallocated.

Spreading your retirement assets out into a variety of investment options allows your portfolio to weather a hit in one area without having a devastating effect on your retirement lifestyle. In addition to diversifying between different types of investments, such as stocks or bonds, you should also try to diversify within each type by investing in companies in different market sectors (healthcare, technology, foreign markets, etc.) Once you have set the initial asset allocation, don't forget to give your retirement portfolio a periodic check-up to make sure you're still getting the most out of your investments.