Perspectives

Focus on Asset Allocation Funds

These professionally managed funds are a simple way to maintain a diversified mix of asset classes in your portfolio.

A portfolio needs two essential attributes to give you the best chance of reaching your investment goals—a diversified mix of asset classes that is appropriate for your goals, time horizon, and risk tolerance; and proper diversification within each class. Building and maintaining a properly allocated and diversified portfolio can be time consuming and complex. Asset allocation funds offer a simple solution. “A well-constructed portfolio has to be properly put together and then maintained,” says Judith Ward, CFP®, a senior financial planner with T. Rowe Price. “You can take these steps yourself—or you can let an asset allocation fund do them for you.”

THE RIGHT ALLOCATION

The first step is to define your goals, time horizon, and risk tolerance. Then you can build a balance of stock, bond, and short-term positions that suit them. In general, longer time horizons call for greater allocations to stocks, and shorter-term goals call for larger allocations to bonds and short-term investments. But maintaining your allocation presents two challenges. First, market movements will skew your exposure to each asset class over time, causing it to exceed or lag your target. To keep your portfolio appropriate for your goals, you need to rebalance regularly. Second, your time horizon will gradually decrease as the years go by. You need to periodically adjust your targets and reallocate your portfolio, shifting more assets from stocks into bonds and short-term investments.

Retirement date funds can establish and maintain your portfolio for you based on a targeted retirement date. Portfolio managers aim to ensure that the asset mix remains appropriate throughout particular time horizons. Alternatively, static allocation funds such as the T. Rowe Price Personal Strategy Funds and T. Rowe Price Spectrum Funds provide an array of options across the risk continuum. Says Ward, “With these funds, you can choose a portfolio that aligns with a level of risk that’s comfortable for you and helps you reach your goals.”

DIVERSIFYING YOUR PORTFOLIO

In order to manage different kinds of risks, it is essential to spread equity holdings among stocks of different sizes (capitalizations), sectors, and geographic regions—and to spread your bond holdings among securities of different maturities, credit qualities, and types. “Diversification is built into these funds,” Ward says. “If you put your money in the T. Rowe Price Spectrum Growth Fund, for example, you know that a targeted portion will be invested consistently in large, medium, and small stocks across all industries, in the U.S. and internationally.” Of course, diversification cannot assure a profit or protect against loss in a down market.

A ONE-STOP SOLUTION

Asset allocation funds can provide a simple, convenient way to keep your investments on track to meet your financial objectives. The next time you review your portfolio, consider whether one or more of these funds might take the place of some of your current holdings. You may find that using asset allocation funds would simplify management of your investments, while improving your chances of reaching your financial goals.

All mutual funds are subject to market risk, including possible loss of principal. The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate date when investors turn age 65. The funds invest in a broad range of underlying mutual funds that include stocks, bonds, and short-term investments and are subject to the risks of different areas of the market. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus more on income and principal stability during retirement. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility.

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