October 2, 2014
When someone discusses asset allocation regarding their investments, what are they talking about? Why is it important?
When someone discusses asset allocation regarding their investments, what are they talking about? Why is it important?
They are talking about there mix of Stocks, Bonds, Reits, and other investments. People want to find the right mix for themselves, the higher the stock amount the more short term market risk you have, while the higher the bonds the less short term market risk you would have. You dont nessisarily want to go 100% stocks because most people would freak out and sell when the market drops hard if you hold all stocks your paper losses are greater in an bad economic time. While bonds help balance your portfolio out, some people like an allocation of 70% stocks and 30% bonds. Once you get an allocation you like, you may want to balance your portfolio and sell whatever had been doing the best and buy the worse off thing, lets say you normally use 70 to 30 and the market changes over a few years have left you at 85 and 15, you would sell the stocks to buy some more bonds to get you back to normal.
Well said, Garrett. Let’s review.
How you divide up your investments between stocks, bonds, and Real estate (REITS included) will provide you a very good snapshot on what your yearly returns will look like over time. Historically (last 87 years), an 80% stock allocation (including stock in REITS) and a 20% bond allocation has produced a return of 9.4% annually.
This is before costs. Focus on selecting the right allocation for you (know your risk tolerance so you won’t flip out when the market drops), and then buy your investments at the lowest possible costs (no-load index mutual funds), while rebalancing every year or so to get back to your desired asset allocation.
You can learn more on this subject by reading any of William Bernstein’s wonderful books on the subject. The Investor’s Manifesto, The Four Pillars of Investing, and The Intelligent Asset Allocator will take you far in your education on this very important subject. Educate and ACT.