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Retirement, Investments, & Insurance for Individuals Build your knowledge What
is asset allocation and how does it work?
What is asset allocation and how does it work?

You need just the right mix of investments to help meet your financial goals.
Explore ideas to create an asset allocation plan that’s right for you.


7 min read | June 22, 2023

You’ve opened a retirement account. You’re making regular contributions. You
invested with the expectation of making a profit. How do you know your money is
working for you?

It’s all about finding your just-right mix of investments (called asset
allocation) that balances your tolerance for risk and potential reward for your
dollars invested over time.

“Asset allocation works in tandem with your comfort with risk; it helps set the
foundation for the success of your investment strategy,” says Heather Winston,
financial professional and product director for Retirement and Income Solutions
at Principal®.

You don’t need to know all the ins and outs right away but getting comfortable
with asset allocation will help you feel more confident in your choices. Here
are some steps to help you find a good mix and maintain it over time.


WHAT ARE ASSET CLASSES?

Investors generally work with three basic asset types (called “classes”): cash,
fixed income, and equities. Each offers a different mix of risk and return and
serves its own purpose in an overall asset allocation plan. The three rarely
move in tandem, so holding some of each class helps provide opportunities for
growth at any point in time.




CASH

Cash and cash equivalents (like money market funds and certificates of deposit)
are the least risky assets. Holding this class in your portfolio enables you to
have cash on hand to make purchases and take withdrawals, and it’s not highly
correlated to other asset classes. While the most stable of investments, cash
holdings offer the lowest potential return.


FIXED INCOME

Bonds are the most common type of fixed income, an investment that can generally
provide income at regular, predictable intervals. Fixed income is normally known
for being lower risk—just not as low as cash. Investments may experience price
fluctuations and lose value if not held to maturity (the intended term of the
bond). But with returns typically higher than cash, fixed income can be a stable
base for your asset allocation.


EQUITIES

Equities, or stocks, can be the growth engine of an investment portfolio. The
return over time tends to come from increases in the price of a stock. Because
growth isn’t guaranteed, stocks carry more risk than the other two asset
classes; they’ll likely fluctuate and lose value at least some of the time. But
they also have the potential for a higher return over long periods.

Learn more:
What is a stock?
What is a bond?


HOW DO YOU KNOW WHAT ALLOCATION IS RIGHT FOR YOU?

Your unique asset allocation—or mix of investments—comes down to several
factors:


AGE AND TIME

Knowing how much time you have can help define how you invest. If you have more
time, you might hold higher proportions of equities to capture that additional
potential growth. As you get closer to retirement age (or needing to access your
money), it’s common to allocate more to fixed income to minimize the risk of
losing the growth you’ve had over the earlier years.




RISK TOLERANCE

Some people are comfortable knowing they could lose money in the short run if
there’s a possibility for bigger gains in the long run. Others are more
conservative, preferring to take less risk with the money. Risk tolerance is the
amount of risk you can emotionally handle at any given point in time and can
vary depending on your age, lifestyle, goals, needs, and income.

Take our risk tolerance quiz (PDF) to get a taste of your current level of
comfort—and know it can change over time.


GOALS

Regardless of your goals, investing requires time for assets to grow. But
depending on what you’re investing for, your asset allocation can differ.

For example, if you’re saving for a home you want to buy in seven years, you may
opt for a more conservative mix of cash and fixed income. If you’re saving for
retirement that’s 30 years away, you might create a mix heavy in equities and
light in fixed income.


DO YOU HAVE TO CREATE YOUR OWN ASSET ALLOCATION?

Not necessarily. A financial professional can help you figure out what the right
mix of investments is for your age, goals, and risk tolerance.

There are also options in investment products where asset allocation is built in
to how they manage your assets. For example, some retirement plans offer what
are called target date funds and target risk funds, which take care of asset
allocation for you.

Alternatively, you may consider a managed account product for an even deeper
level of personalization.


WHAT'S NEXT?

What does your asset allocation look like? Log in to principal.com to find out.
First time logging in? Get started by creating an account.

Investing


--------------------------------------------------------------------------------

The subject matter in this communication is educational only and provided with
the understanding that Principal® is not rendering legal, accounting, investment
or tax advice. You should consult with appropriate counsel, financial
professionals, and other advisors on all matters pertaining to legal, tax,
investment or accounting obligations and requirements.

Investing involves risk, including possible loss of principal.

Investment and Insurance products are:

 * Not Insured by the FDIC or Any Federal Government Agency
 * Not a Deposit or Other Obligation of, or Guaranteed by Credit Union or Bank
 * Subject to Investment Risks, Including Possible Loss of the Principal Amount
   Invested

Asset allocation and diversification does not ensure a profit or protect against
a loss. Equity investment options involve greater risk, including heightened
volatility, than fixed-income investment options. Fixedincome investments are
subject to interest rate risk; as interest rates rise their value will decline.
International and global investing involves greater risks such as currency
fluctuations, political/social instability and differing accounting standards.
These risks are magnified in emerging markets. Small and mid-cap stocks may have
additional risks including greater price volatility.

About Target Date Funds: The Retirement Target portfolios, which are target date
portfolios, invest in underlying insurance company separate accounts, and mutual
funds. Each Retirement Target portfolio is managed toward a particular target
(retirement) date, or the approximate date an investor starts withdrawing money.
As each Retirement Target portfolio approaches its target date, the investment
mix becomes more conservative by increasing exposure to generally more
conservative investment options and reducing exposure to typically more
aggressive investment options. The asset allocation for each Retirement Target
portfolio is regularly re-adjusted within a time frame that extends 10 years
beyond the target date, at which point it reaches its most conservative
allocation. Retirement Target portfolios assume the value of an investor's
account will be withdrawn gradually during retirement. Neither the principal nor
the underlying assets of the Retirement Target portfolios are guaranteed at any
time, including the target date. Investment risk remains at all times.

Investment advisory products offered through Principal Advised Services, LLC.
Des Moines, IA 50392.

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