New investors, at times, tend to be overly conservative with their investment choices. By limiting your investments to only the most conservative choices, you could compromise your ability to live the lifestyle you would like during retirement. And that is the reason why asset allocation is so important.

Essentially, your asset allocation is how you choose to spread your pension savings across the various funds and asset classes available, investing in accordance with your goals and your attitude to risk. This will be the key to managing that all-important balance between risk and reward.

Asset allocation works by ensuring you own different categories of investments, so when some of the investments are down, others may be up. The result is an investment portfolio that has the potential to experience less fluctuation in value than the individual assets within each fund. For instance, if you have a portion of your savings in bonds as well as equities, your portfolio may not be dramatically affected if the stock market experiences a drop in value.

The variety of investment funds available in this scheme range from conservative to aggressive. And each one will fuel your pension portfolio at a different rate. Study all of them carefully. Remember, the mix you choose has a significant impact on the growth of your savings. Studies show that asset allocation decisions alone explain the majority of a portfolio’s long-term performance – making the type of investment much more important than the performance of any individual equity or bond fund.

Your asset allocation strategy should have one overriding characteristic – you. Keep the following factors in mind as you select the funds that will make up your pension portfolio.