How do you decide the right asset allocation for your financial situation? Should you put all your assets in stocks, or maybe divide your money evenly between stocks and bonds? Financial advisers say no single investment plan fits everyone. You have to look at several things before deciding your best asset allocation. First, consider your age and your goals. Ask yourself what your financial needs are and what type of investment will help you meet those needs and reach your goals.

You also have to know your tolerance for risk. Younger investors who have time to ride out a market downturn may want to consider holding more stocks, while investors who are closer to retirement often prefer less volatile investments. Knowing your tolerance for risk is critical, though. If you’ll lose sleep when stock prices fluctuate, you may want to allocate your assets among several types of stocks and include bonds in your holdings.

Knowing what you own. It’s also important to know what you own. For example, if you’ve invested in a balanced or asset allocation fund, you own both stocks and bonds in the same fund. Remember, too, that mutual funds and variable funds often hold widely diversified investments. Some funds may hold stocks and bonds issued by corporations around the globe while others invest strictly in the United States. If you’ve set a goal of investing 20% of your assets outside the United States, for example, you should check the stocks and bonds your funds hold to ensure they fit your financial plan.

In any event, you should check your funds at least once a year because your allocation can shift as markets rise and fall. For example, if you put 30% of your portfolio in bonds, 65% in stocks and 5% in cash, and your equity funds grow twice as fast as your bond holdings, it won’t be long before you have much more in stocks than you had planned to invest. You should look at your asset allocation at least on an annual basis. You may not want to change it each year, but it’s good to think about it.

How do you define Risk? One of the investment terms you hear most often is also one of the hardest to define — risk. Not only does risk mean different things to different people; your own definition will probably change during your lifetime. Every investment holds some degree of risk, even a Treasury bill. Here are three "risk" considerations you should review when planning your investments.

What’s your time frame? Many people define risk as the possibility that the value of their stocks and bonds will go down. Stocks and bonds can be volatile, especially in the short run. That’s why, over the long run, your time frame is perhaps the most critical component in planning your investments. For example, if you are investing for a retirement that is 25 or 30 years away, you have time to ride out the ups and downs of the market. What if your time frame is shorter? If you’re close to retirement or your child is headed to college in just a few years, you may not have the time to ride out a downturn. Your tolerance for risk may be lower and you may want to consider investments that historically have been less volatile.

Will you keep up with inflation? One big risk most investors face is that their purchasing power will be eroded by rising prices in the future. "Playing it safe" and accepting no market volatility also means accepting the potential for lower returns — a risky strategy if you are trying to keep up with or even beat inflation. Even after you retire, you may want to keep some of your assets in growth-oriented investments — you may be retired for 10, 20 years or more.

What’s your goal? This may be the most important question you ask. Being as specific as possible when answering will help you plan. Once you know your goal, match your investments to it. If your goal is ambitious, you may have to accept higher volatility and a greater chance of loss in return for the potential to reap higher rewards. However, if your goal is modest, you may be willing to accept the trade-off of less gain for lower volatility and less chance of losing your capital.

Asset Allocation is the process of dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to optimize the risk/reward tradeoff based on an individual's or institution's specific situation and goals. A key concept in financial planning and money management.

Stock An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he/she owns 5% of the company. Most stock also provides voting rights, which give shareholders a proportional vote in certain corporate decisions. Only a certain type of company called a corporation has stock; other types of companies such as sole proprietorships and limited partnerships do not issue stock. also called equity or equity securities or corporate stock.

Bond A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal. When an investor buys a bond, he/she becomes a creditor of the issuer. However, the buyer does not gain any kind of ownership rights to the issuer, unlike in the case of equities. On the hand, a bond holder has a greater claim on an issuer's income than a shareholder in the case of financial distress (this is true for all creditors). Bonds are often divided into different categories based on tax status, credit quality, issuer type, maturity and secured/unsecured (and there are several other ways to classify bonds as well). U.S. Treasury bonds are generally considered the safest unsecured bonds, since the possibility of the Treasury defaulting on payments is almost zero.

Money Market Funds - Market for short-term debt securities, such as banker's acceptances, commercial paper, repos, negotiable certificates of deposit, and Treasury Bills with a maturity of one year or less and often 30 days or less. Money market securities are generally very safe investments which return a relatively low interest rate that is most appropriate for temporary cash storage or short-term time horizons.