How Asset Allocation Funds Work

An asset allocation fund can help diversify investments and help protect against large losses like the one shown here. See more investing pictures.
Yoshikazu Tsuno/AFP/Getty Images

You want to save up for a home, college tuition or retirement. You know that to make your money grow you're supposed to invest it wisely, but what you may not know is how to actually do it. When it comes to investing, a good rule of thumb is to buy low and sell high. A low market makes for a perfect time to buy, but how low the market will go is an unknown variable. History has shown that the market will go up over time, but the thought of losing a significant amount of money before that happens can be enough to keep investors up at night.

Whether the market is high or low, bull or bear, investing can be a good way to make money over the long term. But how do you protect yourself against huge losses? An asset allocation fund might be the answer.

Investing Pictures

Asset allocation funds are specific mutual funds that divvy up and distribute your money in different investments. Their goal is to generate consistent returns through diversified holdings. These funds divide investments among different asset classes [Source: InvestorWords]. While the reward from investing in this manner may not be as great as investing everything into that hot new stock, the risk is far less.

Still, the thought of putting your hard-earned money into today's markets can be scarier than any horror film playing at the multiplex. Read on to find out how asset allocation funds might make you less timid about investing.