If you’re ready on investing, you probably heard that for the individual investor is always recommend low cost index funds.

However, if you’re a newbie, you may not be safe how to allocate your long-term savings among various types of index funds. So, this post is for you.

The Basics of Asset Allocation

Asset allocation is the strategy used of dividing investments among different kinds of assets.  While we can divide investment assets into different categories, such as  stocks, bonds, real estate and cash there are two main classifications: stocks, and bonds.

Stocks(also known as an equity or a share) – Is a portion of the ownership of a corporation. This portion represents a claim on its proportional share in the corporation’s assets and profits. For instance, If Bill Gates owns 1000 shares of Microsoft and a person owns 50 of them, then he/she owns 5% of the company.

Bonds – Is a security and a debt instrument with the purpose of raising capital by borrowing. A bond is a formal contract to repay the principal along with interest on a fixed intervals. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Some bonds do not pay interest, but all bonds require a repayment of principal.

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There’s plenty more to learn about stocks and bonds. Here’s what you need to get you started:

• Stocks will be riskier than bonds. But for long-term have the potential for higher rewards compared, and the evidence from actual historical returns.
• Also, stocks and bonds don’t always move up or down together. That’s it. As you see, you needn’t to know more to start investing.

Start With Asset Allocation And Allocate Your Assets Accordingly

If you’re just thinking to start with asset allocation, here’s how to allocate your funds until you’re ready to make things more difficult:

You could allocate funds in this way: 60% in the stock fund, while 40% in the bond fund. While for older investors could be an aggressive approach. On the other hand it could be much less adventurous for younger investors. However, if you don’t have lot of money to start you need to know that the biggest influence on your account balance will come from your contribution and not from your assest.

If you have  earned an extra half percent on your $5,000 portfolio by having 20% in international stocks, you missed out on $25. (And it could just as easily cost you half a percent, in which case you saved $25.)

If you don’t have an amount of money for the minimum percentage of stock investments, you can looking for a high yield savings account to earn more money until you do. Once opened an account at your bank,the money you deposit earns greater than average interest.

Once you have reached the amount of money to use to invest for longer period of time, asset allocation decisions become more significant.