Provide an explanation for the concept of asset allocation in investing and differentiate between the 3 stages

Question

What will be an ideal response?

Answer 1

Answer: Asset allocation attempts to ensure that the investor is well diversified, generally with holdings in several different classes of investments, with the objective being to increase your return on those investments while decreasing your risk. The idea of the time dimension of risk is taken into account by recognizing that common stocks are much less risky over a longer time horizon.
Stage 1 is a time of wealth accumulation through age 54. Because the time horizon is long, investments with higher returns and risks should be sought, especially common stocks, to grow into large sums by retirement. Stage 2 consists of the golden years approaching retirement, ages 55 to 64. Here the goal becomes preserving the level of wealth that has already been accumulated and to allow this wealth to continue to grow. Move some of the portfolio, up to 40%, from common stocks into bonds. Stage 3 is the retirement years over age 65 when you are no longer saving, you are spending. Income is now of paramount importance. Allow for some growth in savings simply to keep inflation from devouring your accumulation.