The first quarter of 2010 is finishing up and it’s about time to check up on my Roth IRA. I don’t like to check constantly as I’m investing for the long term and I don’t want to get caught up in the weekly hype of what to buy and what to sell.

What exactly is asset allocation and why is it important?

In short, your asset allocation is your plan for your investment contributions. How are you going to invest? Are you going to put it in stocks, mutual funds, bonds, ETFs, etc? While that may seem like a simple decision to make, it carries risks and rewards.

Historically, while stocks tend to perform well in the long run, it’s volatile in the short term. Bonds offer less risk in volatility but you also tend to get a smaller return. It’s a trade off you have to weigh for yourself and budget accordingly. Having the proper asset allocation means adjusting your allocation to fit your goal of either aggressive growth in the long term, stability of your money in the short term (for people retiring soon), or somewhere in between.

If you’re retiring in a few years, you want to be be conservative and not have most of your investments in stock. Your focus is probably going to be on stability as you’re planning on living off of it for a couple of decades. I have decades before I retire, so I’m focusing on more aggressive mutual funds.

My Roth IRA’s Asset Allocation

I currently have my Roth IRA at Sharebuilder and it’s been pretty cheap to keep it there. However, there are plenty of options if you’re looking for a place to open up an IRA:

  • E-Trade (Annual fee and minimum are waived when you sign up for electronic statements)
  • Vanguard (Some funds require $3,000 minimum)
  • T. Rowe Price
  • Charles Schwab ($1,000 minimum is waived if you direct deposit $100/month)

Right now, here’s what the asset allocation is:

I have a decent amount in cash because I want to buy into a Vanguard mutual fund, but they have a large minimum to purchase. I’ll probably pick it up next month.

Ask Reader’s Thoughts

How are your retirement accounts doing? What’s your current allocation for your investment account? Are you going to change them?

If you haven’t gotten started, now is a great time to start. The sooner you start saving for retirement, the better compound interest will treat you when you retire.