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When talking about our investment portfolio, Money Coach Bill Stanley often speaks about asset allocation – a way to reduce the risk that all our investments won't drop in value at once.

“It is like not putting all your eggs in one basket so you won't lose everything if your basket drops,” he said.

Asset allocation entails splitting your investments into different categories such as stocks (ownership of companies), bonds (lending money to companies or governments), cash, and rental property.

It may sound simple, but unfortunately the monthly statement from brokers or financial institution can be misleading and sometimes downright wrong, Stanley said.

“I've seen broker statements which list asset allocation as: stocks, bonds, and mutual funds. As we know, mutual funds contain stocks and/or bonds; it is not an asset allocation category,” he said. “Another financial statement: stocks, bonds, natural resources, alternative investments and other. The final three categories all contained stocks. Take a look at your monthly statement and if it is not clear, contact a fee-only financial planner or a Money Coach and ask for help.”

Stanley said to watch your asset allocation to make sure you don't have too great a percentage of stocks.

“I recommend for most people that they hold no more than 50 percent of their investments in stocks,” he said. “That is because financial companies have spent hundreds of millions bribing Congress through lobbyists to reduce the effects of financial reform.”

Stanley said the Stock Market crash of two years ago regrettably will happen again, so he also recommends no less than 20 percent in stocks because over the long, long term stocks will outpace inflation.

Too great a percentage of bonds also is not a good idea.

“The value of bond investments will decline when interest rates rise,” he said. “And if you have all your holdings in cash, inflation will eat away your purchasing power in the years ahead.”

The idea is to come up with a percentage breakdown of stocks, bonds, cash, and real estate (your asset allocation) for your personal financial situation. As that percentage changes over time, Stanley said we must "re-balance" out portfolio by selling in one category and buying in another.

"Asset allocation is one of the most important factors in a good portfolio," he said. "The proper asset allocation plus periodic re-balancing will work in your favor and help you reach your financial goals."

Bill Stanley and Money Matters airs every Tuesday on FOX21 Morning News.
If you have a question for Bill, contact him directly: MoneyCoachBill@aol.com