• Your risk tolerance. The advantage of including both stocks and bonds in your portfolio is that when one category is declining, the other category will hopefully offset this decline. For instance, in 2002, the Standard & Poor’s 500 (S&P 500) returned -22.1%, while long-term government bonds returned 17.8%, and intermediate-term bonds returned 12.9%.* One way to assess the percentage of stocks to include in your portfolio is to look at how holding varying percentages of stocks and bonds would have impacted your average return.

• Your time horizon. The longer your time horizon for investing, the more risk you can typically tolerate in your portfolio, since you have more time to overcome any significant downturns. Certainly, individuals with short time horizons, perhaps five years or less, should be very cautious about how much to allocate to stocks. But as your time horizon lengthens, you can theoretically add a higher stock mix to your asset allocation. However, in all situations, make sure you’re comfortable with the percentage allocated to each category.

• Your return needs. Your need to emphasize income or growth is likely to change over your life. When you are trying to accumulate significant assets for a goal far in the future, you may want to allocate more of your mix to stocks. However, when your needs for a predictable income stream become more important, such as when retirement approaches, you may want to allocate more to bonds.

Once you decide how much to allocate to stocks, you need to ensure that you diversify within the stock category. Consider large-capitalization stocks, small-capitalization stocks, value stocks, growth stocks, and international stocks. Each type of stock has different risks and return potential.

* Source: Stocks, Bonds, Bill, and Inflation 2006 Yearbook, Ibbotson Associates. The S&P 500 is an unmanaged index generally considered representative of the U.S. stock market. Investors cannot invest directly in an index. Past performance is not a guarantee of future results. Returns are presented for illustrative purposes only and are not intended to project the performance of a specific investment. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.