(Editor’s note: This is the first of a three-part series dealing with individual investing. NACo and the NACo Financial Services Center provide county employees with a series of voluntary, tax-deferred and taxable investment programs, including deferred compensation. Since employees must manage their own investments, these articles will assist employees in determining appropriate investments for their future retirement and non-retirement planning.)

What is it and how can it benefit you?
Asset allocation is an investment concept that involves investing in more than one asset category. In other words, you decide how much of your money (assets) you want to direct (allocate) into the various funding options that are available through your deferred compensation variable annuity option.

A number of important questions should be considered when making asset allocation decisions. For instance, what is the level of investment risk you are willing to take? Investment risk is defined as how likely you are to make or lose money on an investment.

Each asset category within the variable annuity option has its own risk/return profile. That is, common stock funds are generally riskier than bond funds, which are, in turn, riskier than fixed-return assets, such as money market funds or a fixed option.

How much risk should I take?
Over extended periods, common stock funds have usually provided higher investment returns than bond funds, which have had better returns than money market or CDs, so-called “fixed-return” assets. When deciding how to divide your money between the fixed option and the underlying investment choices within the variable annuity option, how will you know how much risk to take?

There is no correct answer to this question. The amount of risk someone is willing to assume in return for potentially higher investment returns is a personal decision; you need to be comfortable with the amount of risk you assume.

The following are some very general guidelines you may want to consider:

• If you are just beginning your career, you may want to assume more risk than someone approaching retirement. Although the stock market has ups and downs in the short term, it has performed well over the long term. So, if you are a younger person, you have more years for the stock market’s ups and downs to balance out.
• In general, the closer you get to taking a distribution from the plan, the more you might consider gradually moving your funds to some of the lower-risk product options available to you, since you have fewer years for the stock market’s ups and downs to balance out.

Keep in mind, there are many other factors involved that can affect these guidelines. For instance, someone who has many other sources of money in addition to their 457 plan might take on a higher level of risk, even at an older age. Even if their common stock fund choices don’t do as well as they would like over the years, their 457 account will be a relatively small percentage of total retirement income.

On the other hand, those who expect their deferred compensation funds to be a larger portion of their total retirement income might invest more conservatively.

One major advantage of asset allocation is that you can spread your risk levels over many asset categories. Ultimately, choosing an asset allocation plan that fits your risk/return levels is an individual decision.

Nationwide Retirement Solutions (formerly PEBSCO) offers you the option to determine your levels of tolerance with its MoneyGuide brochure. Contact Nationwide at 800/372-0764 to find out more about asset allocation and the MoneyGuide brochure or your Nationwide Retirement Solutions representative.