Asset Allocation
When deciding the proper asset allocation within a portfolio, what information should be addressed?
When deciding the proper asset allocation within a portfolio, what information should be addressed?
Here are some important questions that require answers prior to deciding how much of your portfolio you want in stocks vs. bonds and cash (if you have Real estate in your portfolio, you can divide it up in three or simply consider the Real estate as part of the stock portion based on its level of risk and lack of liquidity).
What is your time horizon? If you have more than 10 years before you need the money, strive to increase your stock allocation in kind. Time is your friend when it comes to those volatile stocks.
What is your risk tolerance? How much does the volatility of stocks bother you? You need to sleep at night and if stocks scare the hell out of you, focus on two things. Educate yourself further to understand why risk is interrelated to return and take a sedative when necessary (that last one was a joke, I think).
What are your goals? Why have you saved and invested your money? Your portfolio and how it is made up should align with your future goals and so that means you want to put some real thought into the purpose of why you are investing.
What is your tax situation? Are you a high income earner or not so much? Are you better off in a tax sheltered pre-tax retirement account or an after tax retirement account or maybe a non-retirement account? Your marginal tax rate in relation to the current long-term capital gains rate should be front and center in this discussion. Speak to an accountant as needed to better understand the issue.
What are your income needs? This applies to those who are in the withdrawal stage and needing money from their portfolio to cover the monthly expenses. If so, you would be wise to focus on withdrawing money from low volatility funds (short-term bond index fund for example) in one bucket while letting the more volatile funds (stocks) do their magic in another bucket.
These questions and many more can be answered in Financial Happine$$ (The World of Money), What Color is the Sky (Investing 101), and Graduation! (leaving the world of work and entering a new frontier). The solution lies with you. Take control of your money and in turn, you will end up taking control of your life. YOU are the answer!