Asset
Allocation
Basics

Determine Your Asset Allocation

Select the asset allocation mixture on your investments carefully. This means understanding the risks that are involved (primarily market risk and inflation risk). Educate yourself on the matter through independent experts who teach instead of sell. Once you know what the right allocation is for you, set it and leave it alone.You will want to answer these questions:

Read All About Asset Allocation, by Rick Ferri. This book will provide you a good foundation of knowledge that will help you with this very important decision. Asset allocation is a pretty simple concept, once you become educated on the matter and understand how to separate your investments in a cohesive and understandable way. Your asset allocation should work hand-in-hand with your financial plan that contains your short- and long-term goals. Vast diversification at the lowest possible cost is the goal and YOU can do it!

John Bogle, author of The Little Book of Common Sense Investing and Common Sense on Mutual Funds provides a simple approach to this issue. Use your age to identify what your bonds and cash allocation should be. If you were 35, you would have 35% of your investments in bonds and cash and 65% of your investments in stocks. Mr. Bogle is a very wise and experienced man. He would admit that this is a pretty conservative allocation, but he would also tell you that many people are not as risk averse as they think. Know thyself!

The Next Steps

Once you have selected your asset allocation, place that money in no-load index funds. You can find a list of recommended funds on this website. Once you become truly educated on investing and discard your ego, you will see the wisdom of investing in these types of funds that diversify you all over the world at the lowest possible cost. Keep it simple.

Purchase your assets, allocate them appropriately, and then leave them alone. Your asset allocation model is not to be touched until it is time to rebalance them. This means no timing the market. No listening to the TV pundits. And, definitely don’t listen to Billy Bob in the break room at work. None of the advice these “experts” spew out is worth a hill of beans!

Rebalance your investments no more often than once a year. This simply means you go in and sell some bonds or stocks to get you back to your designated allocation. You can also do this by simply adding more money to different accounts throughout the year. You should avoid selling in taxable accounts because of the tax consequences. Focus on your company retirement plan and your Roth IRA when rebalancing.

Here is an example using a $300,000 Portfolio with a desired asset allocation of 80%, 70%, or 60% stocks. You would want to keep the Real Estate, Small-Cap Value and Bonds (if possible) in retirement accounts because they are not tax efficient. The other funds could be kept in a non-retirement brokerage and/or a retirement account because they are quite tax efficient.


80% stock allocation

Stocks = $240,000 = 80% of the portfolio

50% / Total Stock Market Index Fund (VTSAX) = $120,000 at .04% expense ratio
20% / Total International Stock Index Fund (VTIAX) = $48,000 at .11% expense ratio
10% / FTSE All-World ex-Small-Capital Index Fund (VFSAX) = $24,000 at .16% expense ratio
10% / Small-Cap Value Index Fund (VSIAX) = $24,000 at .07% expense ratio
10% / Real Estate Index Fund (VGSAX) = $24,000 at .12% expense ratio

Bonds = $60,000 = 20% of the portfolio
80% / Total Bond Market Index Fund (VBTLX) = $50,000 at .05% expense ratio
20% / Short-Term Bond Index Fund (VBIRX) = $10,000 at 07% expense ratio


70% stock allocation

Stocks = $210,000 = 70% of the portfolio
50% / Total Stock Market Index Fund (VTSAX) = $105,000 at .04% expense ratio
20% / Total International Stock Index Fund (VTIAX) = $42,000 at .11% expense ratio
10% / FTSE All-World ex-Small-Capital Index Fund (VFSAX) = $21,000 at .16% expense ratio
10% / Small-Cap Value Index Fund (VSIAX) = $21,000 at .07% expense ratio
10% / Real Estate Index Fund (VGSAX) = $21,000 at .12% expense ratio

Bonds = $90,000 = 30% of the portfolio
80% / Total Bond Market Index Fund (VBTLX) = $72,000 at .05% expense ratio
20% / Short-Term Bond Index Fund (VBIRX) = $18,000 at 07% expense ratio


60% stock allocation

Stocks = $180,000 = 60% of the portfolio
50% / Total Stock Market Index Fund (VTSAX) = $90,000 at .04% expense ratio
20% / Total International Stock Index Fund (VTIAX) = $36,000 at .11% expense ratio
10% / FTSE All-World ex-Small-Capital Index Fund (VFSAX) = $18,000 at .16% expense ratio
10% / Small-Cap Value Index Fund (VSIAX) = $18,000 at .07% expense ratio
10% / Real Estate Index Fund (VGSAX) = $18,000 at .12% expense ratio

Bonds = $120,000 = 40% of the portfolio
80% / Total Bond Market Index Fund (VBTLX) = $100,000 at .05% expense ratio
20% / Short-Term Bond Index Fund (VBIRX) = $20,000 at 07% expense ratio

Asset Allocation Resources

See the most current return averages based on allocation models.

Click Here

*Link provides historical averages only. They will not tell you what your return will do in any given year. What it will do is help you see how different asset allocation models compare over the years based on how many stocks or bonds and cash you have in your portfolio. Use this as an educational tool to further your understanding of asset allocation.

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Stuff the lawyer wants me to say: Investing outside a bank or a credit union is not FDIC insured. You may lose the value in the investments you select. All information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, or other products named. Translated: I am not selling anything! Educate yourself, research the information that you learned and finally make the right decisions that will benefit you and your family going forward.

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