Asset allocation – the way an investor divides holdings among stocks, bonds and cash – is widely viewed as the most important factor in long-term results.

The idea is to get the bigger returns historically provided by stocks, while reducing your overall risk by putting some money into bonds and keeping a super-safe reserve in cash, which means bank accounts or money markets.

But what allocation is right for you?

The simple approach is probably just as good as the sophisticated one. Basically, the younger you are, the more you should put into stocks or stock funds, figuring you have plenty of time to wait out any downturns.

As you get older, you shift more to bonds, bond funds and cash. Bonds and cash don’t grow as fast as stocks, but they’re safer.

One old rule of thumb said to subtract your age from 100 and use the result as the percentage of assets that could go to stocks. A 30-year-old would, thus, put 70 percent into stocks, keep 10 percent in cash and put the remaining 20 percent into bonds. A 70-year-old would put 30 percent into stocks, 10 percent into cash and 60 percent in bonds.

For a slightly more refined approach that’s still pretty simple, look at the accomsimple, look at the accompanying

table, adapted from one put out recently by The Vanguard Group, the Malvern fund company.

Vanguard has just launched six Target Retirement Funds that invest in a variety of stock, bond and cash funds based on the investor’s expected retirement date. The funds then automatically change the asset allocation as the investor gets older.

Someone who will retire in a 2005 could select the fund with 35 percent in stocks, 65 percent bonds and no cash. But an investor who won’t retire until 2045 could use the fund with 90 percent stocks, 10 percent bonds and zero percent cash.

Lots of readers of my recent column on U.S. Savings Bonds were intrigued by the somewhat unconventional idea of investing in these bonds for the short term to beat the returns offered by banks and money markets. Savings bonds, which pay interest for 30 years, are usually thought of as a long-term holding.

As I said, you cannot redeem one of these bonds until you’ve owned it for 12 months, and if you redeem it before five years have past, you give up the final three months’ interest.

Still, savings bonds can beat the alternatives in as short a term as six months.

Inflation-indexed bonds being sold now will pay an annual rate of 4.66 percent for the first six months. That means you could earn 2.33 percent over that period.

After that, the rate will adjust. The bonds will continue to pay the 1.1 percent annual fixed rate that is guaranteed for 30 years. The second part of the rate, the floating or variable part, will be adjusted Nov. 1 to match the inflation rate for the most recent six months.

So let’s assume the worst case – that the inflation rate was zero. The bonds would then pay only the 1.1 percent annual fixed rate for the second six months you own them. That comes to 0.55 percent for that period.

If you redeemed after 12 months, you’d lose half of that, leaving just 0.275 percent.

Add that to the 2.33 percent earned in the first six months, and you’d make about 2.6 percent for the full 12 months.

That’s more than double the 1.08 percent currently paid by the average 12-month certificate of deposit.

And there’s a chance the floating portion of the rate will be higher than zero, though it’s not likely to be much higher.

Remember that you don’t get the interest earnings on a savings bond until you redeem it, so they’re no good if you need steady income.

Many banks sell savings bonds, which can be purchased for as little as $25. Or buy them online at http://www.publicdebt.treas.gov/sav/sav.htm.

Jeff Brown is a business columnist for The Philadelphia Inquirer.

E-mail him at brownjphillynews.com.)

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