You don’t need to be a great stock-picker or have a degree in investment banking to make money through investments.  In fact, study after study has shown that the vast majority of the returns from any given portfolio result from the asset allocation of that portfolio.  In other words, by simply choosing a nicely diversified mix of stocks, bonds, cash, and other investments, you can make an educated guess about the potential returns of your investments. 

Your target asset allocation will change as you get older; “maturing” to a more conservative mix as you near retirement.  For quarterlifers with 30 or more years until retirement, however, a very aggressive mix of large cap, small cap, and international stocks (or mutual funds/ETFs) is most appropriate for a retirement portfolio. 

Personally, I like to keep my investments allocated like this:

45% Large Cap stock
35% International stock
15% Small Cap stock
5% Cash

There are tools available to help you decide on and maintain an asset allocation.  For example, Quicken offers great tools for analyzing your asset allocation, and Janus provides a [1] free asset allocation tool on the web.You can use asset allocation in combination with dollar cost averaging.  If you invest $500 each month, for example, and use the allocation I described above - you would simply split your monthly investment like this:

$225 into a large cap mutual fund or ETF
$175 into an international mutual fund or ETF
$75 into a small cap mutual fund or ETF
$25 into cash

Using asset allocation in combination with dollar cost averaging makes investing simple.  You need only pick a few investments to begin with, and check on your portfolio once a year to maintain your target allocation.  For example, if your large cap portion has grown significantly and now makes up 60% of your portfolio, but small caps only account for 5%, you would sell 10% of your large cap investments and use the proceeds to purchase additional small cap investments.  Doing so causes you to sell assets that have performed well and buy additional shares of those that are lagging - automatically buying low and selling high!

Next time, we’ll take a closer look at what investments to consider for your retirement portfolio.