To determine the ideal asset mix for your financial situation, start with 3 things: your goal, your time frame, and your risk tolerance:

1. Your goal

What are you investing for? Retirement? A down payment on a house? It’s possible to have multiple goals, but it may be easier to focus on one at a time.

2. Your time frame

How much time do you have to invest before you’ll need the money? Consider how you plan to make withdrawals. Will you take all the money at once (to put toward a down payment on a house)? Or over several years (like withdrawing from a retirement account throughout retirement)?

Your time frame affects the amount you’ll need to save to meet your goal. Let’s say you want a $10,000 down payment in 6 years. If you open an account with $100 and earn a 6% average annual return, you’ll need to save around $114 a month for 6 years to reach $10,000. All other factors being equal, if you want the same down payment in only 3 years, you’ll have to save over $250 a month.

Note: This hypothetical example does not represent the return on any particular investment and the rate is not guaranteed.

3. Your risk tolerance

What’s your comfort level with the unknown of market returns? Generally, stocks are riskier than bonds, and bonds are riskier than cash.

Your target asset allocation should contain a percentage of stocks, bonds, and cash that adds up to 100%. A portfolio with 90% stocks and 10% bonds exposes you to more risk—but potentially gives you the opportunity for more return—than a portfolio with 60% stocks and 40% bonds.

Each asset class responds differently to market movement. Holding investments from each one reduces your overall risk, which means your portfolio will be in a better position to weather market ups and downs. The percentage you invest in each asset class may be the most important factor in determining your portfolio’s short- and long-term risks and returns.

• Stocks can provide the biggest potential for growth, especially over the long term. As a part of your retirement plan, you could own stocks as direct ownership in a company, or as part of a mutual fund or exchange-traded fund that bundles different investments—including hundreds or thousands of stocks and bonds. In exchange for more growth potential, however, you're likely to experience more ups and downs in the value of your investment, making stocks generally the riskiest of the three asset classes.

• Bonds generally have a more moderate risk than stocks. Like stocks, you could own them in funds that bundle different investments. Bonds can help balance out risk in a portfolio—but less risk can come with smaller potential rewards. While bonds can help steady a portfolio, you may earn less from them than you would with stocks over the long term.

• Short-term reserves are often referred to as cash. In your retirement plan, these can include money market funds and stable value investments. You can also think of money in savings and checking accounts in this group too. These investments seek to provide stability, but their potential for growth is limited. This can be a risk when factoring in inflation—the rising cost of things like food, gas, and utilities. If your investments aren’t keeping up with inflation, you’ll lose buying power over time.