From Here to Financial Happiness

Day Fifty Seven It's All in the Mix

The key driver of both our portfolio's short‐term price swings and its likely long‐run return is our so‐called asset allocation. What's that? It's our basic mix of four investment categories: stocks, bonds, cash investments like money‐market funds and savings accounts, and alternative investments such as gold, real estate, and hedge funds.

Stocks are undoubtedly risky in the short‐term, but they can be a portfolio's engine of growth over the long haul, generating gains that easily outstrip inflation. Cash investments almost always prove to be low risk, but there's a strong likelihood they'll lose us money once inflation and taxes are factored in.

What about bonds and alternative investments? Most bonds would count as a conservative investment, kicking off a steady stream of interest without too much fluctuation in price. But some can give investors a wild ride, including high‐yield junk bonds, emerging market debt, and Treasury bonds with 20 or more years to maturity.

Similarly, alternative investments are a mixed bag. The hope with alternative investments is that they'll post gains when the stock market is falling. But they don't always deliver on that promise – and many suffer wild price fluctuations. That's why investors often limit alternatives to 10% of their portfolio's value and some avoid the category entirely.

You should have a target asset allocation for each of your major goals. For instance, if you plan to buy a house in the ...