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You've built your emergency fund, determined your goals and their costs, and thought about how much risk you can take. But how do you know which securities to buy? Which ones are going to get you where you need to go?

Before you begin choosing individual mutual funds and stocks, you need to think in broader strokes. You need to consider your asset allocation.

Your asset allocation is your portfolio's blend of stocks, bonds and cash. Finding the best asset mix is crucial to meeting your goals. In fact, most financial advisers agree that setting up the right asset mix is more important than choosing great investments. Determining your asset allocation is easier than ever, thanks to a variety of online calculators and other tools.

This course addresses what you need to know before determining your asset mix and how to use's Asset Allocator to figure out your blend. It will also discuss the limitations of online asset-allocation tools.

What you need to get started

No matter which asset-allocation tool you use, you'll need to know a few bits of information first. For starters, you need to know your goal. Let's say it's to have $1 million when you retire. You then need four pieces of information about that goal to determine your asset mix.

  1. The number of years until your goal is reached. You want to retire in 30 years. That's the number of years to your goal.
  2. How much money you need for your goal. You want to have $1 million when all is said and done.
  3. How much money you can invest right now. You have $20,000 set aside, so that's your starting amount.
  4. How much money you can contribute each month. You can invest $800 per month.

Using's Asset Allocator's Asset Allocator can show you how likely you are to reach your goal using a variety of asset blends. It tells you how much risk you'll need to assume to get close to your goal. (Note: Asset Allocator is a benefit of Premium Membership. If you're not a Premium Member yet, you can sample the benefits for free with a trial membership.)

Figuring out what your portfolio should look like is just a matter of plugging in the appropriate information.

For example, we've filled in Asset Allocator's blanks using the information from the last step in this course. The Portfolio Value is $20,000, Monthly Investments are $800, Number of Years is 30 and Financial Goal is $1 million as a lump sum.

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Asset Allocator's default asset mix is 0% cash, 30% bonds, 45% large-cap stocks, 15% mid-/small-cap stocks and 10% foreign stocks. The probability of reaching the goal given this default mix isn't that great, though. Asset Allocator estimates that you have only a 26% chance of winding up with $1 million. Your possible three-month loss from this portfolio is an estimated 10.3%.

See what it looks like by trying Asset Allocator yourself.

Improving the odds

There are some things you can do to improve your chances of meeting your goal.

Invest more now: If you can invest $30,000 now instead of just $20,000, your odds improve to 30%.

Up your monthly contributions: Maybe you can't come up with an extra $10,000 now. But if you invest an extra $200 each month, the likelihood of hitting the $1 million target rises to 42%.

Extend your number of years: Maybe you can't put in more money at all but can wait an additional five years before retiring. Your chances improve to 51%.

Become more aggressive: If you can't invest more money or time, try changing your portfolio mix.

So what is the best solution? Possibly it's a combination of all of the above. To see the effects of these adjustments, a tool like's Asset Allocator can help. In Asset Allocator, click "aggressive" under Portfolio Asset Mix % and you'll get a portfolio that's even lighter in cash and bonds and heavier in stocks: 15% bonds, 55% large-cap stocks, 17% mid-/small-cap stocks and 13% foreign stocks. The odds of reaching your goal with that portfolio improve to 33% from 26%. The trade-off is an increase in short-term volatility: Your possible three-month loss steepens to an estimated 12.2%.

You can even adjust the portfolio mix yourself. Make it more or less aggressive by dragging the markers on the asset mix bar. As you make changes, the Asset Allocator numbers show you how reachable your goals are.

Limitations of asset-allocation tools

While online tools such as's Asset Allocator certainly make asset-allocation decisions easier, they have limitations.

For example, if you use six different online asset-allocation tools, you're likely to get six different recommendations for what your asset mix ought to be. Why? Because every tool uses a different set of assumptions.

For example, Asset Allocator assumes a 2.5% inflation rate. Other tools use higher and lower inflation rates, and some will even allow you to choose your own rate. (For details on how Asset Allocator makes its calculations, check out the tool's Help section.) Different assumptions lead to different results.

Further, most online asset-allocation tools don't take taxes into account. That's because each investor's tax situation is different. But in the real world of investing, taxes are a huge issue. Realize that the final portfolio values you get from these various tools are generally pretax.

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Despite these limitations, online asset-allocation tools are a godsend to investors. They may not be 100% accurate to your specific situation, but they at least get you in the ballpark.