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How to choose the right mix of investments

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.

Types of accounts

General investing
You invest in a taxable account on your own or with advice. The money in these accounts can be used for anything you want.

Education
Invest after-tax money in a 529 account. You don’t pay federal taxes on gains if they are used for qualified education expenses.1

Retirement
You may get tax breaks 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 1/2.2

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.

LESSER RISK
LOWER POTENTIAL RETURNS

Cash
Bonds
Stocks

GREATER RISK
HIGHER POTENTIAL RETURNS

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:

What is my time horizon?
Conservative
I might need it tomorrow.
I don’t want to lose a penny.

Moderate


Aggressive
I won’t touch it for decades.
I’m willing to take on risk for potential rewards.

How do I feel about taking risks?

The answers can help guide your allocations toward specific goals.

Possible allocations*

16% Cash
26% Stocks
58% Bonds

Goal:
Down payment on a home in seven years

Risk profile:**
Conservative
You don’t want to lose much.

2% Cash
59% Stocks
39% Bonds

Goal:
Your five-year-old’s college education

Risk profile:
Moderate
You can handle some market fluctuations.

2% Cash
88% Stocks
10% Bonds

Goal:
A comfortable retirement decades from now

Risk profile:
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, August 20203

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.

  1. 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.
  2. Effective 3/27/20, in accordance with the CARES Act, a Coronavirus-Related Distribution CRD) of as much as $100,000 of all your eligible employer-sponsored retirement plan or IRA assets is permitted before December 31, 2020. The CRD may be repaid to an eligible retirement plan within three years. Individuals who choose not to repay the distribution will be required to include the taxable portion of the distribution in income evenly over three years from the date of distribution, unless they elect otherwise. With limited exceptions, the 10% additional tax that usually applies to distributions prior to age 59½ is waived for CRDs.
  3. 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 and a wholly owned subsidiary of Bank of America Corporation.
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The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.

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Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss.

Investment products:

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May Lose Value

Bank of America and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.