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What is asset allocation anyway?

Got two nickels to rub together? Keep them in separate pockets.

Asset allocation is about not putting all your eggs in one basket. It's the ultimate protection should things go wrong in one investment class or sector, as is likely to be the case from time to time.

For example, many people loaded up on technology stocks in the late 1990s. When the market corrected in 2000, many of these investors experienced steep losses.

Or, you may put your money into bonds, among the safest of investments. Yet the bond market, too, has its up and down swings. Disgusted with that market, you put your money in a money market account. However, though virtually bomb proof, this market provides far lower returns. After all, less risk means lower rewards. And even modest inflation steadily erodes the value of your cash.

Moreover, a bad year in the stock market may show up as nothing more than an insignificant blip by 2015 or certainly by 2025. This is because the stock market is historically the best long-term investment vehicle - one that can deliver an average return of more than 10 percent annually for those willing to stick it out for the long haul.

In the short term, however, the stock market is more volatile than other investments. Consequently, investors with less risk tolerance - and this generally includes people who are close to retirement age - should put less money into the stock market and invest more in bonds. Younger people, however, can take on more risk because they have a longer investing horizon.

Your risk tolerance and goals will determine how much you put into each of the three investment categories. If you make careful choices with your asset allocation, you'll earn better returns without losing sleep.

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CNN MONEY 101

Listed below are CNN MONEY 101 topics and their opinions. Some of the opinions I may not share or reccomend, however, feel free to gain a greater knowledge on the basics as this is why I have posted this on my site...

TOPICS

LESSON 1 - Setting priorities

Here's help for the first -- and often the hardest -- step in achieving your financial goals: deciding which goals to pursue.

LESSON 2 - Making a budget

How to bring your spending under control, so that you get the most out of every dollar.

LESSON 3 - Basics of banking and saving

Here's how to get the best banking services at the best price, either online or off.

LESSON 4 - Basics of investing

An introduction to making money in stocks, bonds and mutual funds.

LESSON 5 - Investing in stocks

The market can be a great place to turn savings into wealth -- or to lose your shirt. Here are some fundamentals of investing wisely.

LESSON 6 - Investing in mutual funds

It's a mutual-fund jungle out there. Here's how to create a simple portfolio that works.

LESSON 7 - Investing in bonds

Bonds can provide a steady and reasonably secure income, while adding ballast to your portfolio--but only if you really understand what you're buying.

LESSON 8 - Buying a home

Owning your home is part of the American Dream, but if you’re not prepared, buying it can be a nightmare. Here are some fundamentals for buyers and sellers.

LESSON 9 - Controlling debt

You've got to know when to hold debt--and when to fold it. This lesson shows you how to accomplish your financial goals by making debt work for you.

LESSON 10 - Employee stock options

More companies are handing out stock options, and to a much broader group of employees. This lesson gives you vital information on how to handle ESO's.

LESSON 11 - Saving for college

It's not rocket science, just common sense. By starting early and investing regularly, your children may have a wider choice of colleges, and paying the bill won't hurt as much.

LESSON 12 - Kids and money

Up until they start earning a living, and sometimes well beyond that, kids are apt to spend money like it grows on trees. This lesson will help you put your children on the road to handling money responsibly.

LESSON 13 - Planning for retirement

Achieving a comfortable retirement in the 21st Century requires a new approach to retirement planning.

LESSON 14 - Asset allocation

The single most important thing an investor can do is practice asset allocation. Here's how.

LESSON 15 - Hiring financial help

What to keep in mind when when seeking professionals to handle your financial planning, stock trading, insurance coverage and tax returns.

LESSON 16 - Health insurance

Whether your employer provides you with a group medical plan or you need to buy coverage on the individual market, understanding how health insurance works is the best way to get your money's worth.

LESSON 17 - Buying a car

Buying a car is like no other shopping experience. The choices seem to be endless. This lesson helps you sort through your options.

LESSON 18 - Taxes

Among the long list of necessary evils we must encounter throughout our lives, perhaps the most constant -- taxes -- is also the least understood. But the whole process isn't nearly as baffling as you may think.

LESSON 19 - Home insurance

Homeowners' insurance can be a nightmare. It's costly, confusing, and unrewarding -- until you have to use it. Here, you'll learn how to purchase peace of mind now and later.

LESSON 20- Life insurance

*** Find out why buying term may not always be the best option. There are other aspects other then life insurance that should be considered.

Life insurance is critical to financial planning. It's a necessity for anyone with dependents who would be affected financially by your demise. Yet life insurance is one of the hardest financial products to understand and it's sold by agents who are sometimes more concerned with their commissions than your needs.

LESSON 21- Estate planning

Americans are in the midst of one of greatest inter-generational transfers of wealth in history, yet few of us have done any planning for it. Here's how to start.

LESSON 22- Auto insurance

Auto insurance can be a nightmare. It's costly, confusing, and unrewarding -- until you need it. Here's how to purchase peace of mind now and later.

LESSON 23 - 401(k)s

It's the most important tool you've got for retirement. Here's how to make the most of it.

You can also send us an e-mail if you have questions or comments about Money 101.

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What is asset allocation anyway?

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CNN MONEY 101