We have been through some of the volatile markets in decades in 2009. The housing market collapsed. The stock market saw its worst decline since the Great Depression. After the last couple of years, you should know your risk tolerance when it comes to investing.

As with all storms, the darkness has dissipated (at least for now) and some sectors made tremendous gains. Emerging markets have seen gains of 75% or more. Stocks such as Apple rose almost 148%. If you were fully invested in 2009, you saw gut wrenching drops only to be followed by many indices making new multi year highs. If you started out properly allocated, chances are your portfolio is now out of synch.
Why you need to be properly allocated?

What is Asset Allocation? If you agree with the saying "buy low, sell high", chances are you agree with the theory of proper asset allocation. In short, you are selling those stocks or indexes which have appreciated the most and replacing them with stocks or indexes which underperformed. Once you have chosen your portfolio, it is paramount to review it at least once a year. Depending on your outlook on asset allocation theory, some argue to rebalance every 6 months. The value of the various assets within your portfolio will change, affecting the weighting of each asset class. Failure to reallocate and make adjustments will result in a portfolio that is volatile and will not serve your retirement needs.

Although past performance does not guarantee future success, proper asset allocation has been incredibly effective. The tricky part though is trying to find YOUR proper allocation. A 20 year old who has a 40 year time horizon before retiring will be allocated differently than a 55 year old with just 5-10 years from retirement. Don't take enough risk in your portfolio and your investments will be ravaged by inflation. Take too much risk and you could suffer huge losses (2008-2009) which you may never recover.

How do I Make Sure I'm Properly Allocated? There are numerous factors to take into account when determining how your assets should be allocated. This is where an experienced financial planner will help tremendously. A planner will take into account your lifestyle, accumulated savings, risk tolerance, health and other factors to determine how you should be invested. Below is a list of investment sectors which you should consider as part of your overall portfolio:

- Cash-Such instruments can include Cds, money markets or high yielding checking accounts
- Bonds: Bonds can be broken down into several categories:
- Corporate Bonds-These may be high quality bonds or low quality (junk/high yield)
- Foreign Bonds-You have the ability to purchase bonds of foreign countries
- Municipal bonds-Bonds of individual states, municipalities, or governmental agencies
- Treasury/US Government bonds-These can be purchased in short, intermediate or long term
- Foreign currencies
- Natural resources such as oil or natural gas
- Precious metals such as copper, silver or gold
- Real estate/Real Estate Investment Trusts (REITS)
- Stocks: Stocks can be broken down into the following categories:
- Small cap
- Medium cap
- Large Cap
- Growth
- Value
- US domestic,
- Emerging markets
- Foreign stocks

Of course there is also the matter of determining which mixture of stocks is appropriate. Will you chose to allocate money to small cap emerging market stocks or Large cap US Growth stocks? As you can see, simply dividing your money among a two to three market sectors will not achieve proper diversification.

Portfolio Correlation
Each of the above market sectors will outperform the other sometime during the economic cycle. Small cap and emerging market sectors tend to outperform large cap stocks when the economy is starting to emerge out of a recession. Gold and metal stocks tend to do well when there is economic uncertainly. It is extremely difficult to guess what type of market you are in while it is happening.

Where is the market going? I haven't got a clue Some financial pundits and economists were calling for the Dow Jones Industrial average to reach as low as 5000. Others were calling for a modest recovery off the lows of 6500. There is a very good chance you didn't call a 4000 point rally in the Dow in March. Get 50 economists in a room and chances are you will have 50 different answers on where the stock market will reach in a 12 month period. Asset allocation will assist you and help take out the guesswork of what economic cycle you are currently invested in.

Owning Many Asset Classes Won't Insure Against a Down Market
Asset allocation will not insure you against a market collapse. If you are invested in 10 different market categories and they are all correlated, chances are you will suffer right along with the general market. However if you have non correlated investments such as US stocks, emerging market stocks, gold, bonds and investments in overseas currency, chances are your portfolio may outperform a single indice such as the S&P 500 or the Dow Jones Industrial Average.

Should you suffer a 50% decline in your portfolio, your returns will have to DOUBLE just to break even.

What percentage of return can I expect? There is no mathematical formula or anyone who can absolutely guarantee you will receive a 10% return by investing in stocks. Over a long period of 50 years, yes stocks have returned about 9%, however as seen by the last decade, the return of stocks have been close to 0%. In fact, those 100% invested in the S&P 500 (the standard benchmarks of the US stock market) have seen returns of.9% including dividends. If you invested 100% in stocks, you lost to inflation and would have seen better returns by investing in boring government bonds. However, you probably didn't have a crystal ball. This is why you need to be properly allocated.

If you'd like to see some long term calculations on what you can expect your investments to grow to, check under the term "monte carlo simulators" with your favorite search engine. If you are a customer of Fidelity, they have a great one.

Wrapping it Up In closing, there is no way to absolutely bombproof your retirement. As we've seen by this decade alone, your investments will be prone to outside forces you have no control over. There will be recessions, perhaps a depression, political unrest, a terrorism event either here or abroad which will rattle the markets and affect your personal financial well being. The key to surviving and prospering is hiring great people. This would include a financial planner and an accountant to guide you and take advantage of situations as they arise. After all, there are some investors who purchased Citibank at.97 and Apple at $30.

There is always a way to make money in whatever economic condition you are presented. Think smart, invest wisely, keep your cool and drown out the unwanted noise. If the guys on CNBC were THAT smart and successful, they would be retired sipping mojitos on the beach. Well, at least that's what I'd be doing. Happy investing!