Mixing it Up!
Asset Allocation
Many experts agree that asset allocation will account for 90% of your return. Asset allocation in a broad sense is a form of diversifying and in a more specific sense is the proportional breakdown of stocks (or stock mutual funds), bonds (or bond mutual funds), and cash (or cash equivalents such as Treasury bills). An example of an asset allocation could be 70/20/10. This allocation would represent 70% in stocks, 20% in bonds, and 10% in cash. Asset allocation requires one to maintain this desired allocation for long period of times, rebalancing when necessary.
For example, say you chose the 70/20/10 allocation just mentioned and a year from now when you check your annual statement you see your stock portion of your portfolio has performed extremely well so that your allocation is now 85/10/5. In order to rebalance, you would need to exchange some of your stock allocation for bonds and cash until you get back to the 70/20/10 allocation.
What factors should you use when deciding upon your specific asset allocation? Three important factors include: Investment goals, time horizon, and risk tolerance.
Glossary Terms:
- Large-cap stocks: firms that have issued $3 billion or more of stocks
- Mid-cap stocks: firms that have issued $750 million to $3 billion of stocks
- Small-cap stocks: firms with less than $750 million of issued stock
- Micro-cap stocks: firms with less than $100 million in issued stock
Garman & Forgue
If you want to think about what your portfolio should look like, you should check out the Asset Allocator Calculator below. You will need to enter your
- Age
- Current level of investable assets ($$$)
- Amount of annual savings
- Marginal tax rate (again for many this is lower like 15%)
- Amount of income you need generated each year. For most of us, this is zero, we do not need income today, we need growth.
- Your overall risk tolerance
- How you think the economy will perform
Once you have these in your mind, click on the calculator to see how you might consider investing
