An asset allocation plan will guide how you spread investments among broad asset categories to balance risk and reward in your portfolio. There's no single plan that's right for everyone. To create the best plan for you, you'll need to consider:

• Your time frame
• Your investment goal
• Your comfort with volatility

All 3 need to be thought through because no 2 investors are alike. Investors who seem similar at first can need very different asset allocation plans.

Consider these hypothetical couples

Fictional investors John and Lucy Watson are 40 years old, as are Bill and Betsy Holliday. Investing with an eye toward retiring at age 65, each couple has $100,000 saved for retirement so far. Should both couples follow the same asset allocation plan?

At this point, we don't know enough about them to say for sure. We know they have similar time frames, but we don't know any details about their goals or their comfort with volatility.

Defining their investment goals

The couples are both saving for retirement, but that goal isn't defined enough. For asset allocation purposes, it's better to define the goal as a specific dollar amount each couple will need to live the lifestyle they want in retirement.

The Watsons plan to live out their lives in the house they already own. They look forward to having more time to compete in bridge tournaments and tend the roses in their garden. They've determined that a nest egg of $900,000 will let them live comfortably.

The Hollidays want to build a house on several acres of land they own and live there in retirement. They also want to travel internationally at least twice a year. They feel they'll need $1.5 million to enjoy retirement the way they want.

Balancing goals and comfort with volatility

Some people can stomach quite a bit of volatility, but that doesn't mean they need to. Others may be more risk averse and want to avoid volatility in their portfolio, but that might require a rethinking of their goals.

The Watsons believe the stock market trends upward over time. When the market dips, they feel sure it will recover and their investments will be fine in the long run. They're comfortable with volatility.

The Hollidays started investing in the late 1990s. They loved investing in stocks until the Internet bubble burst, and their portfolio shrank by 50%. They want stability in their portfolio from now on.

Ultimately, asset allocation planning is about finding the mix of assets that lets you aim for the return you want with a level of risk you can handle.

Get help from a professional

Suppose we learn that the Watsons live in a state with no income tax, and the Hollidays live in a state with a high income tax rate. How will that affect their ability to reach their goals? Could it also impact the types of investments they choose?

As you can see, there are many balls in play when making an asset allocation plan. We recommend letting a financial advisor help you create your plan. He or she can bring your financial picture into focus, help define your goal and balance it against your retirement time frame and comfort with volatility.