How to choose the right mix of investments
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Whether you already invest or are just starting out, you may wonder how to find the right choices from so many possibilities. Start by considering your goals, risk tolerance, time horizon and liquidity needs. Knowing what you want to achieve makes it easier to find the right mix—or asset allocation—to help you get there.
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What are your goals?
Let’s say you want to start a business, help your child pay for college later on, and are also planning for your retirement. To help pursue these important goals, you may invest in different accounts.
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You invest in a taxable account on your own or with advice. The money in these accounts can be used for anything you want.
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Invest after-tax money in a 529 account. You don’t pay federal taxes on gains if they are used for qualified education expenses, and you may get a state tax deduction on contributions.1
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You may get tax benefits on contributions or gains in certain accounts, such as a 401(k) or IRA, if you keep them in there long enough, usually until at least age 59 ½.
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Your investment choices
Now, consider the types of investments you have to work with. Some may offer potential for greater returns over time but with a greater risk of loss. Others are less risky but may give you more modest returns. A diverse mix is designed to help protect you from periods of volatility when markets move sharply up or down.
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Finding your mix
With a clear idea of your goals and investment choices, you’re ready to start thinking about asset allocation. For each goal, consider these questions:
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Possible allocations*
• Cash 5% • Bonds 71% • Stocks 24%
Down payment on a home in seven years
Conservative: You don’t want to lose much.
• Cash 1% • Bonds 41% • Stocks 58%
Your five-year-old’s college education
Moderate: You can handle some market fluctuations.
• Cash 1% • Bonds 8% • Stocks 91%
A comfortable retirement decades from now
Aggressive: You can withstand big market drops.
* These are intended only as samples. Your choices may differ.
** Risk profile is a measure of your tolerance for market volatility and your ability to absorb fluctuations in your investments’ value.
Source: Bank of America Corporation Chief Investment Office, January 20242
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Rebalance regularly
Over time, market ups and downs can throw your original asset allocation out of whack. Your original 60% of stocks could become 80% or 40%, and your personal goals may change as well. Schedule a time, say every year, or as needed, to review your investments and adjust each account, if necessary.
Your investments are an important part of your financial strategy, which should also include day-to-day budgeting and saving for short-term goals. Many tools can help you with your financial decisions. Or you could get personalized assistance from a financial advisor. With a little effort, you could have an investment mix that’s tailored for the life you have–and designed for the one you want.
- To be eligible for favorable tax treatment afforded to any earnings portion of withdrawals from Section 529 accounts, such withdrawals must be used for “qualified higher education expenses,” as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax as well as state and local income taxes.
- The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).
