1. What is asset allocation anyway? Asset allocation is about not putting all your eggs in one basket. It's the ultimate protection should things go wrong in one investment class or sector, as is likely to be the case from time to time. For example, many people loaded up on technology stocks in the late 1990s. When the market corrected in 2000, many of these investors experienced steep losses. Or, you may put your money into bonds, among the safest of investments. Yet the bond market, too, has its up and down swings. Disgusted with that market, you put your money in a money market account. However, though virtually bomb proof, this market provides far lower returns. After all, less risk means lower rewards. And even modest inflation steadily erodes the value of your cash.

2. Moreover, a bad year in the stock market may show up as nothing more than an insignificant blip by 2015 or certainly by 2025. This is because the stock market is historically the best long-term investment vehicle - one that can deliver an average return of roughly 10 percent annually for those willing to stick it out for the long haul. In the short term, however, the stock market is more volatile than other investments. Consequently, investors with less risk tolerance - and this generally includes people who are close to retirement age - should put less money into the stock market and invest more in bonds. Younger people, however, can take on more risk because they have a longer investing horizon. Your risk tolerance and goals will determine how much you put into each of the three investment categories. If you make careful choices with your asset allocation, you'll earn better returns without losing sleep.

3. Finding the right mix The ultimate financial goal, of course, is retirement. How soon you retire - and in what style – can be greatly affected by your decisions on asset allocation made earlier in life. In accounting for risk in your asset allocation, it's more productive to think in terms of your tolerance for volatility. This is because one of the greatest investment risks is the risk of doing nothing – and missing out on superior returns. Those retiring in 15 years but with little tolerance for wild swings may want to keep 50 percent in stocks and 40 percent in bonds, with 10 percent in a money market account. If this person is planning to retire in 25 years, he or she might ratchet the equities holdings up to between 70 and 80 percent.

4. Those retiring in five years are faced with the daunting task of allocating their assets for maximum return without betting the farm. A nasty market dip could occur immediately before retirement, leaving your nest egg drastically short. Achieving the right mix of stock types (small-, mid-, and large-caps) and bonds (short-, medium-, and long-term) to achieve maximum return for your volatility tolerance while maintaining adequate diversification is a tricky business, so you may want to consider consulting a qualified financial planner or adviser. Before you actually invest in accordance with your newly minted allocation plan, you will want to do something that few individual investors do: Find out specifically what you own. Most people don't know precisely what they own because their portfolios are dominated by an accumulation of mutual funds. If you strip away the marketing veneer of each fund and do some investigating, you can not only find out what the fund says it invests in, but also what it actually owns.

5. For example, some funds may call themselves small-cap. But, these same funds may veer into large-cap territory to boost their returns if their sector is out of favor.

6. Top things to know 1. Time is on your side. Those with more years until retirement can afford to put a greater percentage of their assets in the stock market. 2. Stocks mean risk and return. Those with a higher tolerance for volatility should put more money in the stock market than those in the same age group who have a lower tolerance. 3. College savings funds need stocks. Since college costs are rising faster than inflation, no other investment will keep pace as well as stocks. Invest more in stocks when your kids are young, and as they get older move more money into bonds. 4. Get professional advice. One of the best ways to develop an effective asset allocation plan is to consult a qualified financial planner.

7. 5. Allocation is the key to achieving your goals. Studies have shown that asset allocation is the single most important factor in determining returns from investing. 6. Know your stock funds. Before you set up your asset allocation plan, you must find out the nature of the companies purchased by the mutual funds you own. It's not enough to go by the names of the funds themselves, either. In search of performance, far too many fund managers buy stocks that barely fit their portfolio's explicit investing parameters. So your "income" fund may, in practice, contain many stocks that should be considered "growth," or vice versa. 7. Know your bond funds. Similarly, you must learn the same about the bond funds you own. 8. Don't rely on software alone to build a savings plan. Software programs might not go far enough to devise your asset-allocation plan.

8. 9. Determine your long-term goals. Do you want to buy a sailboat after you retire? Or pay off your mortgage so you can write a novel? Figure out what your long-term goals are, and what they will cost. 10. Get started. It's never too late to get started, and it's never too late to revamp or revise an asset-allocation plan

9. Basic Allocation Equity (Stocks) Fixed (Bonds) Cash (Money Market) _______ 100% Detailed Allocation EquityFixed Large Cap - GrowthUS Govt - Value Muni Mid Cap – Growth - ValueCorporate Small Cap – GrowthHigh Yield (Junk) - Value___________ 100% 100%