Financial Planning, Investments, Retirement

Feelin’ Good about your Asset Allocation?

 

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It’s 2018, Game of Thrones final season is still a year away, its 2 degrees out and the Stock Market is at an all time high!

NOW is the perfect time to determine if you have the right blend of STOCKS, BONDS, & CASH in your portfolio. We are starting at the highest level looking down- “Does the blend of these 3 asset classes match your risk level, your goals, financial situation, and timeline? 

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Setting up the right asset mix might be more important than actually choosing great investments!

Your goal is to keep the percentages for the 3 main asset classes the same until there is a change is your tolerance, time, or financial circumstance

Investors have a greater fear of volatility than inflation, because inflation is insidious, taking its toll little by little.“Asset Allocation”- Roger C. Gibson

With the market at an all-time high your exposure to stocks maybe higher than you’re comfortable with and leave you exposed to a larger percentage loss should the market take a rapid dive.

Ergo, why we are talking about asset allocation and diversifying to reduce your risk.

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How do I figure out my Asset Allocation?

You could use a general rule of thumb that says your age is your guideline. If you’re 45 years old, put 45% of your portfolio into cash and bonds and the rest into stocks. Not a lot of thought or customization here, but better than nothing.

If you can put down the remote for a moment, there are some other options.


Risk Tolerance

Your risk tolerance ( comfort level with investing) should be what drives your asset allocation.

You could start with your employer if you have an employer sponsored retirement plan. They typically have tools in brochure form or online to help determine your Risk tolerance.

It should give you a roadmap to investing based on the choices they provide our plan.

Pester them! Trust me they are getting paid enough.


Try Google…

You could jump on the internet and try an online asset-allocation tools, such as  Vanguard Risk Tolerance

This will give you a basic Stock/Bond percentage based on a few questions.

  • When do you need this money?
  • How much fluctuation can you stomach without making an emotional reaction that causes you to sell?

 

If asked what did you do when the market collapsed in 2008, answer honestly!

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  • How much movement in the market can you tolerate?

-10%,   -20%,  -30%

Always convert that question to real dollars, meaning if your portfolio is worth $100,000, could you really stomach a loss of 30% ($30,000) and not react.

 


 

Life-cycle Funds

Another alternative is look at what asset mixes Target-Date/ Life Cycle funds employ for people with your same goals.

A life-cycle fund is a diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its “target date.”

For simplicity, lets use Vanguard again as an example.

For someone 20 years from retirement, Vanguard uses an asset mix of almost 80% Stocks and 20% Bonds. Asset allocation as of 11/30/2017

To go deeper into the next level of Allocation, they break it into:

Vanguard Total Stock Market Index Fund Investor Shares 47.7%

Vanguard Total International Stock Index Fund Investor Shares 31.2%

Vanguard Total Bond Market II Index Fund Investor Shares**14.8%

Vanguard Total International Bond Index Fund Investor Shares 6.3%

So really just “US Stocks and Bonds” and “International Stocks and Bonds”.

(this is not an allocation I am recommending, but merely showing you what is out there as far as information)

If you are new to this or just starting out, you really don’t need more than this. Keep it simple folks.


 

Is that all there is? Add a little water to my Purina Puppy chow and stir?

Hell, no!

 

 

 

Going a little further past the 3 main Asset Classes we can break it into a more detailed

7 Asset classes:

  1. Short Term Debt: alternative, no rate risk, money market, CD, Fixed Annuity, Short Term bond
  2. Domestic Bonds: High & Low risk, Intermediate & Long term
  3. International Bonds: International & Emerging Market
  4. Domestic Stock: Large, Mid, Small, convertible
  5. International Stock: Large, Mid, Small, Emerging
  6. Real Estate: Security, Pooled, Partnership, Direct
  7. Investment Hedges: Precious metal, Commodity,  Hedge Fund

We can also further diversify across size, style, sector, and geography for equities and sector, credit quality, maturity and geography for fixed income.

But that is for a future discussion, folks.


By keeping your allocation carefully balanced based upon your risk tolerance, you’ll be able to endure market fluctuations without losing sleep and not sacrificing too much upside. Get on it.

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