The Retirement Corporation of America

Frequently Asked Questions:

Q: What is Asset Allocation?

A: Asset allocation is considered the single greatest determinant of investment performance, with security selection and market timing having only a minor impact on performance.

There are many definitions of what asset allocation is, but simply put, it is the process of determining which asset classes will be included in your portfolio, and then how much of the portfolio will be allocated to each asset class.

Investors should begin the asset allocation process with a broad perspective, allocating the portfolio among the three broad asset classes: equities (i.e. stocks), bonds and cash.

However, over the last 30 years, investors and investment professionals have more information available and must now consider sub-asset classes when creating their strategic asset allocation plan.

For domestic equities, sub-asset classes include Large Capitalization (Cap), Mid Cap and Small Cap stocks.

For international equities, the sub-asset classes include Large Cap and Emerging Market stocks.

For bonds, sub-asset classes include Short-term, Intermediate-term, Long-term and High-yield bonds.

In addition to the asset classes decisions, you must also consider what style you want to have in your portfolio, value or growth stocks.

Determining the appropriate amount of your portfolio to allocate among the broad and sub-asset classes, and then to determine the style diversification you need in your portfolio, is a decision that requires many tools, both quantitative and qualitative. Having the assistance of a professional money manager is highly recommended in today's market environment.

Following are descriptions of these asset classes:

Market Capitalization (Market Cap)
A company's total stock market value, calculated by multiplying the price of a single share by the total number of shares outstanding.

Large-Capitalization (Large-Cap) Stocks
Large caps are stocks of companies whose market value is above a designated minimum, usually in the neighborhood of $10 billion.

Mid-Capitalization (Mid-Cap) Stocks Companies whose market value is between $1 billion and about $10 billion.

Small-Capitalization (Small-Cap) Stocks
Companies with a market capitalization of $1 billion or less.

Emerging Markets
Investments in countries with developing economies such as those in Latin America and Asia (excluding Japan). Emerging market investments tend to be quite volatile due to political and economic instability.

High-Yield Bonds
Bonds that are rated as below investment grade. The issuers of these bonds, which are judged to be at a higher risk of default, have to pay an attractive dividend to compensate investors for the additional risk.

Value Stocks
Stocks that have a lower-than-average price as measured by such metrics as price-to-earnings or price-to-book ratios. Value investing is often considered the opposite of growth investing, which concentrates on finding companies with above-average sales and earnings growth prospects.

Growth Stocks
Companies believed to be growing earnings and sales faster than the average company in the market. Growth stocks usually pay little or no dividend, as they are still at a stage in their businesses where they are reinvesting most or all of their earnings into the further development of new areas of the business.

How can I measure portfolio performance?

What is Comfort Stock?

What is Asset Allocation?

What is an "industry benchmark"?

What do the credentials "CFP" mean?

What is the difference between a value stock and a growth stock?

Can I protect a large concentrated position in one stock against severe drops in price?

How do I know if I have enough money to retire?

Whom can I talk to about my tax situation for the year that I retire?