What’s Your Pie? A Guide to Asset Allocation

One way to help protect yourself from market ups and downs is to develop an asset allocation strategy. But if you think it’s too complicated, look again. The basic rules are simpler than you think.

Your choices boil down to just three things: stocks, bonds and cash (also called "short-term investments"). These are the "asset classes," and yes, there are just three of them. So "asset allocation" is the process of dividing up your investments among stocks, bonds, and cash in a way that makes sense for you.

How do you begin the process? Think of it in terms of a pie – or a pie chart. To begin dividing your money, start by slicing into the pie.

Step 1 — Looking at the Asset Classes

Stocks: The first slice in your pie is stocks, which are shares of ownership (or "equity") in a company. Stock mutual funds generally invest in the stocks of many different companies or industries. Although past investment results do not guarantee future results, stocks have historically provided the highest long-term returns and the greatest risk.

Bonds: The next slice is bonds. Generally less risky than stocks, bonds are issued by companies or governments and represent the issuer’s promise to repay you with interest. Bonds typically offer moderate returns and risk compared with stocks.

Short-term investments: The last piece of the pie is short-term investments, which include money market funds. This asset class involves the least amount of risk, but also provides the lowest potential return. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in these funds.

Now that you understand the asset classes, the key question is how much of your US Airways 401(k) Savings Plan money should you put into each?

Step 2 — Slicing Your Pie

The right investment mix for you should match your financial needs, your comfort with risk, and how long you have to invest your money before you will need it.

• If you are further from retirement, a portfolio with a higher allocation of stock funds may be appropriate, if you are comfortable with the associated risk.
• As you near retirement, you may want to focus more on preserving what you have and begin shifting toward relatively less risky investments, such as bonds or short-term investments.

If your tolerance for taking risk is low, you may find yourself preferring relatively less risky investments, regardless of how far you are from retirement. But leaving long-term money in lower-risk investments could short-change your interests. Your money may not keep pace with inflation, so you could have less purchasing power just when you need it most.

Step 3 — Looking at Your Investment Options

Once you have reviewed the asset classes and determined how you’ll divide your US Airways 401(k) Savings Plan money, the last step is to review your investment options. Spreading your investments among many different holdings or investment styles is key to managing risk.

• Within your stock allocation, consider including funds that invest in large (large cap), medium (mid cap), and small (small cap) U.S. companies, as well as foreign companies. Note that each of these types of stock investments has its own level of risks — for example, small cap funds tend to be more risky than large cap funds.
• For bonds, diversification may entail investing in short-, intermediate- or long-term funds; corporate or government bonds funds; or high-yield bond funds.

The general rule of diversification is that while some of your investment choices may falter, others may perform well, although neither asset allocation nor diversification ensures a profit or guarantees against loss. A good rule of thumb for this process is quality over quantity. Things to keep in mind:

• Instead of chasing short-term performance, look at performance over the long term.
• Consider the investment options’ rankings assigned by independent investment research firms.
• Remember, past performance is no guarantee of future results.

For help with your pie, try the Asset Allocation Worksheet. Click on the link under the Asset Allocation section on the lower half of the page, then take 15 minutes to answer some key questions and see how your situation compares to four sample portfolios.

In the end, picking investments for your US Airways 401(k) Savings Plan account can be a little like choosing the right foods to eat. Variety is nice, but it’s the proportion that’s most important.