As we grow older and enter different stages of our lives, our financial requirements radically change. Therefore, investments that were perfect for us in our 20's, when we were just starting our careers are almost never the same vehicles that are best for us during our retirement years. To ensure that you have the resources you need for every stage of your life, it is imperative that you have an investment plan for each of those periods.

That is why no portfolio should be without an allocation strategy. Allocation simply means the mix of stocks, bonds and cash in your investment portfolio. A couple of rules of thumb:

1. Stocks tend to be more volatile than bonds, but have historically experienced higher returns.
2. The greater your expected return, the more volatility and risk you can expect.

Portfolio allocation will and should change as dictated by your personal lifestyle requirements. Here are some examples of typical allocations during different life stages:

Single, 25-year old, in first job after college

Typically a renter, this investor would have no major financial responsibilities, except possibly the repayment of student loans. With 40 years of work and savings in front of her, she can afford an aggressive investing strategy. A portfolio of 80% stocks and 20% cash might suit her needs perfectly.

Upwardly mobile, single, no children, 35 years old

Generally, this investor is a first-time homeowner, seeing healthy annual income increases, and beginning his prime earning years. He should concentrate on growth investments with the ideal portfolio consisting of 80% stocks and 20% cash.

Married couple, dual careers, 35 years old, 2 small children

Will most likely have a mortgage and are trying to save for their children's college education. In their prime earning years, they should maximize their growth investments, yet begin to consider some fixed vehicles. The ideal portfolio for them may be 70% equities, 10% fixed income, and 20% cash.

Example Married couple, 55 years old, with grown children

Staring retirement in the face, this couple should begin thinking about preservation of capital and income needs. A portfolio of 60% equities, 20% fixed and 20% cash may be just what they need.

Retired couple, 70 years old

A few years into retirement, with a life expectancy of maybe another 12 to 20 years, this couple wants to make sure their money lasts as long as they do. Thus, they need income as well as continued growth in the portfolio. They would do well to structure their portfolio to include 30% equities, 50% fixed income and 20% cash.

Widow, 80 years old

A decade or so since retirement, this investor will generally have a life expectancy of another 5-10 years. In her years of retirement, she has probably figured out exactly how to live on the monies she and her spouse accumulated. Yet she is also concerned with rising medical expenses. After those two needs are met, she is most interested in preserving her capital for her heirs. Thus, she would continue to invest for income and want to remain very conservatively invested, with a sufficient cash position. Her optimal portfolio might consist of 10% equities, 60% fixed income and 30% cash.

No matter in which category you fall, you will need to go through the following process to determine the best allocation for your portfolio.

I. Determine your investment goals - What do you hope to achieve by investing?

Growth, or appreciation of value, is best achieved by investing aggressively in equities. The Dow Jones Industrial Average (DJIA) has averaged 11% per year since its inception. But remember: The higher your expected return, the greater the volatility in your investments.

Income-oriented investors should consider less aggressive equities such as mature companies with stable earnings that pay dividends. Additionally, they should consider adding fixed income investments such as bills, notes and bonds that provide a steady stream of income to their portfolios.

Fixed income is an excellent way to balance out the volatility of stocks and also helps hedge against stock deflation during times of higher interest rates.

Capital preservation is for investors who just want to make sure they don't lose their principal. The most conservative of strategies, it results in a portfolio that is defined as "close to cash". Your returns won't be spectacular, but your principal will stay intact in spite of market fluctuations. An investor may choose certificates of deposits, government guaranteed investments, or money market funds.

Note: There are certainly more asset classes in which you can invest, including real estate, art, limited partnerships, commodities and many others, each with their own particular characteristics. You will need to decide if any of those investments meet your personal guidelines.

II. Your time horizon - How long before you need to access your money? Will you need it in five years for a downpayment on a home, in ten years to pay for a child's education, or in thirty years when you retire? And if the money is needed for retirement, how long do you expect your retirement to be?

Short-term.
If your time horizon is less than 5 years, you should keep your investments as close to cash as possible.

Medium-term.
If you don't need your money for at least 5 to 10 years, you can afford to consider a mix of equities, fixed income and cash - perhaps a 50%, 20% and 10% combination. This will be more volatile, but gives you the potential for much higher returns.

Long-term.
The longer you hold an investment, the better off you'll probably be. Although you will see bear and bull markets in the long run, historical statistics tell us that staying put through the lean times will result in a positive overall return for the market and your investments. A long time horizon lets you take more risk by investing in a heavier equity-weighted portfolio - perhaps as much as 80% -- and thus increases your return potential.

III. Your risk tolerance. Risk doesn't mean that you are going to lose your investment. It simply means the amount that your investment's value will fluctuate over time. Risky investments rise and fall more at a more rapid rate than safer investments. The relationship between risk and return is direct - as your potential return increases, so does your level of risk. Remember that diversification among assets and categories within those asset classes reduces your risk.

Low
If you would not be able to tolerate a short-term decline in your assets of 10% or less, equities should make up no more than 25% to 30% of your portfolio.

Medium
If your risk tolerance is a little higher, and you could stand to watch your portfolio decline by 20%, keep no more than 50% of your portfolio in equities.

High
If you are more of a risk-taker and can bear a 30% to 40% short-term decline in stock prices, your portfolio can afford a 70% equity allocation.

Now that you have considered all of the above possibilities, it is time to develop your personal portfolio allocation.

I'll leave you with just a few reminders:

• An investment plan is crucial to your long-term financial well-being
• Diversification among asset classes and investments within those classes is extremely important
• Err on the side of conservatism
• Start early and be disciplined in contributing regularly to your investment program

I wish you the best of fortune in your investing future.