What percentage of a retiree's investments (excluding her own home and contents) should be in the money market (or outside of equities)?
Asset allocation is possibly the single most important aspect of successful investing.
In terms of the capital market, there are four principal asset classes that one can invest in. These vary in terms of risk (or, rather, volatility) which is generally measured as by how much that asset is likely to go up or down in any given year, and potential return.
Basic investment philosophy dictates that the higher the potential risk, the higher the potential return.
In order of least volatile to most the order would be cash (e.g. the money market) followed by bonds (government and corporate), then Listed Property (i.e. commercial not residential) and, finally, equities (i.e. shares in the stock market).
Possessing a healthy and appropriate exposure to all of the above is key in maintaining a diversified portfolio and it has been proven time and time again that diversification is important in a prudently managed investment portfolio.
The risk, however, is having diversification purely to say you are diversified — this is a common mistake.
Diversification is critical in risk management (dampening volatility) and return expectation. Research continually points back to asset allocation as the single largest contributor in achieving your investment objective; in fact, over 90 percent of what determines your ultimate returns is related to your asset allocation.
So then, the first aspect to understand is what return your money needs to achieve in order for you to live the best retirement possible (from an income perspective); from there the asset allocation should be constructed around it.
Article continues on page two and three: how to determine your asset allocation including tables to help you along...