Do You Know Your Asset Allocation?

by Galia Gichon on January 20, 2011

When I am doing a retirement makeover with a client, it is the first exercise I do to make sure she is on track.  We will be going through it in detail during my next LIVE Teleclass Personal Finance Bootcamp” starting 2/7. Details below.

The term itself can turn you off in dealing with your investments.  I’ve gotten a few phone calls next week from some pretty scared clients.

“The bond market is going to collapse.”

“Europe is going to pieces!”

I know, I read the papers and the same news.  While I do not have the crystal ball and do not know what the future brings, I can protect myself by remaining diversified and keeping my investment fees as low as possible.  If you know your asset allocation, it is the first step in preparation and then ensuring you have the right balance.  Your asset allocation simply means the percentage of stocks and bonds you have in your portfolio.  Here are a few typical situations I see all the time:

1) Not investing your retirement portfolio at all. You never chose any investments and your IRA tends to be in the money market or stable value fund.  While this is safe in a down market, you are also missing returns in up markets.  In 2010, the S&P 500 earned 15%.  You will end up losing money in the long run due to inflation.

2) None or too little bonds. Younger people have the misconception that they can take on unlimited risk.  A very general rule of thumb is: 110 minus your age is the percentage you should have in stocks.  If you are 35, 110 – 35 is 75 which means you should have 75% in equity or stock mutual funds.

3) Be sure to minimize your company’s stock. You should not have more than 5 or 10% max.  I’m always surprised when I see that people still contribute so heavily to their company’s stock in their 401k after the Enron crisis.  I also think it is due to inertia as many plans use this stock as a default for their matching.

4) Only pick one fund from each category. For example, only one large cap mutual fund.  Or only one small cap mutual fund.  It is easier to do checkups with fewer funds and you are eliminating the chance of owning the same stocks in multiple funds.

5) Lower fees as much as you can. While you do not necessarily have control over which funds are in your 401k, you can choose index funds if they are offered, which have the lowest expense ratios in the industry.  If you manage your own IRA, you do have a choice!

{ 0 comments… add one now }

Leave a Comment

Previous post:

Next post: