Asset Allocation: Part 1 of 5
Often financial “experts” make asset allocation difficult to understand. Our goal in this series of this blog is for you to understand asset allocation thoroughly, in an easy to understand format. Through this series of articles, you will learn (1) what asset allocation is and why it is important, (2) what determines your asset allocation, (3) the main asset categories, (4) your ideal asset mix, and (5) when and how you should rebalance your portfolio. This first article will teach you what asset allocation is and why you need to use it.
Asset allocation simply means how your investment portfolio is divided across different asset classes or investment types. This is often confused with diversification. Diversification refers to buying a number of investments within an asset category to reduce investment risk.
Asset allocation theory states that by dividing your portfolio into different types of investments, you can reduce the volatility of your portfolio. Some financial experts claim this is more important than the individual stocks you choose. We believe that both proper allocation of your portfolio and careful selection of investments within each asset category is the key to long-term investment success.
"Proper asset allocation combined with careful selection of investments within each asset category is the key to long-term investment success."
There are two main types of asset allocation – strategic and tactical. Strategic asset allocation is a long-term approach to how the assets are to be divided among various investment categories. Using strategic asset allocation, your asset mix only changes if your life circumstances change. Thus, it is a less active approach to asset allocation. Tactical asset allocation is active portfolio management that attempts to improve investment performance by shifting money from one investment category to another. Since tactical asset allocation is a more time-intensive practice and can result in a higher level of risk verses reward, when compared to strategic asset allocation, this series of articles will focus exclusively on strategic asset allocation.
Asset allocation of yesteryear used to be simple. The formula was to subtract your age from 100. This resulted in the percentage of your portfolio you should have invested in stocks. For example: a 65-year-old would have 35% in stocks and 65% in bonds and cash. But, due to longer life expectancies, people run the risk that their investments will not grow fast enough to last their lifetime, when following this formula. Reading this series of articles and using Bob's retirement calculator available at Retire Fast. can help prevent this from happening to you.
In our next Series Part 2, you will learn what determines your asset allocation.
Asset Allocation Series by Retire Fast LLC., (Companies and mutual funds mentioned in our blog are used as illustrations or suggestions for study and are presented for educational purposes only. They are not to be considered as endorsed or recommended for purchase by Retire Fast.) Investors should conduct their own review and analysis of any company of interest before making an investment decision. Investors should further consult their accountant, tax expert and/or financial advisor before making any investment decisions. Neither Retire Fast.. nor its content providers are responsible for any damages or losses arising from any use of this information. Copyright © 2017 Retire Fast, LLC. All rights reserved.
