March 22, 2014 Admin | March 22, 2014 What is asset allocation? How can the average person apply it to their financial affairs?
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Asset allocation is when you make sure that your potfolio is the right mix of bonds, stocks, reits and international options that are right for you. The average person doesnt really need to worry about it to much until they get closer to having 100k in their investments, if you have under that you are better off focusing on the few accounts you know instead of getting in to more risky or more versatile account types, such as riets or international stocks. When starting out you are fine just using one stock index and one bond index if you use a good one, once you get more money under your portfolio you can branch off in to riets, international stocks, growth stocks, or other indexes that you chose.
Also at Vanguard when opening a new account to start making your portfolio more diverse you should open the new account with a 10k starting investment so you can get admiral shares right off the bat.
You are a mighty smart man, Garrett. Let’s review.
Asset allocation simply means how we decide to allocate our money between different kinds of securities like stocks, bonds, and Real estate. When you are young, allocating a large portion of your portfolio to stocks is wise and then as you age, you might consider reducing that percentage as you own more bonds and cash as you get closer to accessing that money.
This can all be done by owning no-load index funds in your company retirement plan, Roth IRA, and taxable accounts outside of your retirement accounts. It is wise to focus on costs at every turn. YOU control costs, you do not control the markets. Diversify over many asset classes and countries as you mitigate your risk with different investments that go up or down in different environments.
Don’t complicate this. Own a total stock market index fund and a total bond market index fund. Feed them continually and as the portfolio grows over time, add in other investments like an international index fund, a REIT index fund, a small-cap value index fund, and a large-cap value index fund. Time and your consistent habits will help you grow that portfolio over time. Believe it!