What Is the Asset Allocation Process?
An investor selects assets in order to meet goals. Retirement, paying for your kids' education, or buying a house are different investment goals. You would use investment strategies called, respectively, growth, income and capital preservation to attain these goals.
With a 401(k) allocation, you are saving for retirement, and should
focus on maximizing the return you will make over the long haul.
This calls for a growth strategy, in which making the
most money over a long time horizon is your main
Once you have an investment goal, you need to decide what level of risk you are willing to take with your allocation. Answering the following question might help: are you more worried that your account will decline in the short term, or that it won't grow enough to meet your retirement goals? Remember that the best long-term allocation may look like a loser in any given year.
At this point you should have some idea about your investment goals and the level of risk you can bear, and you should also understand the relationship between risk and potential return. Now you can start selecting asset classes -- small cap or international stocks, bonds or money markets, etc. -- to put your investment plan in motion.