Comments on: How to Determine Your Asset Allocation

By: DIY Investor

DIY Investor — Tue, 18 May 2010 00:33:30 +0000

Asset allocation is about your basic split between stocks and bonds. Within stocks and bonds there are various sectors.Investing in these sectors gives you diversification. For example there are big cap stocks and small cap stocks. There are value stocks and growth stocks. If you aren’t participating in these sectors you are not well diversified. If you invest only in the S&P 500 you are in just one corner of the stock market.
The same holds with bonds. There are various parts of the bond market and to be well diversified means to participate in these sectors.
With target date funds it is worth noting that if you go to 5 different brokerages you will get 5 different allocations. If you are willing to let your risk tolerance be set by a cookie cutter approach then go for it. There are tools on line for others to help with risk tolerance.

By: NateUVM

NateUVM — Fri, 04 Dec 2009 18:45:09 +0000

More to saladdin’s point, I don’t think it’s a big deal to add another fund into the mix with a Target-Date fund. Of course…I am biased, because that is exactly what I have done with my 401(k).

I liked the idea of a pre-set allocation all rolled up into one fund, but even the most aggressive Target-Date funds (and as my planned retirement is still a ways off, I’m already in the most aggressive category) didn’t have a large enough allocation to foreign markets.

So, I looked at what % of the Target-Date fund was invested internationally, figured out how much more would need to be invested to meet my desired allocation, and tacked on an international fund with that %. Rebalance quarterly, and I’m all set… My own custom portfolio. Until, of course, I get to a point where I want to be less aggressive. But that is a ways down the line, and I don’t mind setting it in what I have it in now and forgetting it (thanks Ron Popeil).

Let’s not also forget to mention that Target-Date funds tend to have lower expenses due to their being mostly indexed and not actively managed. More $$$ in the bank.

By: NateUVM

NateUVM — Fri, 04 Dec 2009 13:31:21 +0000

Diversification isn’t limited to just spreading your investment within the same asset class (a bunch of stocks from separate issuers vs. a bunch of stocks from one). Diversification can be acheived by spreading your investment over a bunch of different asset classes, within investments with different maturity dates, and with varying risks.

For instance, one way of diversifying that not many people realize is to invest in several CDs with different term lengths (similar, but not identical to a ladder). It’s all in the same asset class…heck, it’s all in the same basic investment, but it’s still diversifying.

In the case of Asset Allocation, what we are talking about is simply another form of diversification. You are spreading your investment amongst different asset classes, mitigating risk, by limiting your exposure to any one asset class.

Diversification isn’t limited to Asset Allocation, but Asset Allocation is a form of Diversification.

By: Jim

Jim — Thu, 03 Dec 2009 17:46:04 +0000

Yeah, but randomly picking is better than letting the plan administrators pick for you.

By: jsbrendog

jsbrendog — Thu, 03 Dec 2009 15:42:22 +0000

haha wow. yeah i am going to guess that randomly picking a fund for your 401k is NOT the way to play it. it is like guidance counselor’s throwing gum at a board of professions when trying to judge what your future may hold hahaha

By: saladdin

saladdin — Thu, 03 Dec 2009 11:08:33 +0000

Why don’t you just adjust your “new” fund instead of worrying about the target fund?

And calling them a waste of time is silly. They have a purpose, a very good purpose. It’s not like if I invest in only 2 funds, a target fund and an emerging fund out of Brazil, that I will never be able to retire.

saladdin

By: Finavigation

Finavigation — Thu, 03 Dec 2009 01:18:26 +0000

In my opinion, asset allocation is one of (if not the) most important thing in determining what type of returns you end up getting from your portfolio. It’s one of the “big things” you can do right that you’ll be glad you did down the road.

Something about diversification that some people don’t understand is that you’re not necessarily diversified just because you invest in different mutual funds.

An important part of diversification is investing in assets whose performances aren’t correlated. In other words, when one performs poorly, the others aren’t likely to do the same.

If you’re buying a few different funds but those funds are invested in many of the same stocks, then you’re probably not sufficiently diversified and may be exposing yourself to excess risk if those holdings perform poorly.

Additionally, you may be sacrificing some good returns in other uncorrelated funds.

By: Manshu

Manshu — Thu, 03 Dec 2009 01:18:15 +0000

I feel Target Retirement Funds are a waste of time if you are buying something else with them. Because then your whole portfolio needs to be balanced with this new allocation, which defeats the original purpose.

By: Izalot

Izalot — Thu, 03 Dec 2009 01:15:24 +0000

I use the 120-age rule then for the stock portion I divide it into the following:

Large caps-25%
Mid caps-25%
Small caps-15%
Foreign-25% (12.5% Euro and 12.5% Emerging market)
Real Estate-10%

I’m very limited in what mutual funds I can get through my retirement plan, but in the broad categories I laid out I choose the ones with the smallest service fees.

I also re balance my portfolio 1-3 times a year.

By: Mike Piper

Mike Piper — Wed, 02 Dec 2009 23:45:14 +0000

Meanwhile, you get to beat 80% of other mutual funds.

By: aua868s

aua868s — Wed, 02 Dec 2009 23:24:14 +0000

index funds help me be an “investor” without getting my hands dirty on scouring through wall street journal, barrons and like…

By: Kevin@OutOfYourRut

Kevin@OutOfYourRut — Wed, 02 Dec 2009 23:21:51 +0000

SO well put Saladdin!

By: saladdin

saladdin — Wed, 02 Dec 2009 23:15:38 +0000

Wish I would have been 100% gold.

saladdin

By: Jim

Jim — Wed, 02 Dec 2009 22:46:30 +0000

The stock market is volatile and everyone knows it, you don’t have to invest in the stock market… in fact, you don’t have to invest at all. If you do, you need to take steps to protect yourself.

It’s like driving. Driving is dangerous but you take steps to protect yourself like wearing a seatbelt.

By: saladdin

saladdin — Wed, 02 Dec 2009 22:35:13 +0000

I don’t know what you mean by “wiped out.” I lost 40% last year but was not wiped out. I am up 40% this year. I know that doesn’t put me even but that’s far from wiped out.

saladdin