Asset Allocation An Investment Recipe

Don't let the six syllables fool you; asset allocation is a simple concept that you're probably already familiar with. Have you ever ordered a pizza for a group of friends, and to please everybody, you got pepperoni on one half and mushrooms on the other, with extra cheese on half of the mushroom half? Divvying up the pizza pie and selecting appropriate toppings for each portion is similar to selecting different types of funds in particular portions to complete a fund portfolio. When it comes to your money, instead of pizza toppings, you're dealing with different kinds of investments: stocks, bonds, international investments, and so on. (I define and describe these in Chapter 1.)

Asset allocation simply describes the proportion of different investment types that make up your mutual fund portfolio. So if someone asks, "What's your asset allocation?" a typical response may be, "I have 60 percent in stocks, a third of which is in foreign stocks, and 40 percent in bonds."

You may hear a mutual fund nerd spout off about his allocation between "large-cap" and "small-cap" stocks, or between "growth funds" and "value funds." Don't worry about these terms for now (for the nerd in you, you'll be happy to know that I cover these other fund subcategories in Chapter 9). Even after you finish reading this book and become a mutual fund hotshot, you should be mostly concerned with the general asset allocation decisions: namely, allocating between stocks and bonds, and between U.S. stocks and international stocks.

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