Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!
You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!
I still need someone to confirm that they can register for free. The site is a little different than when I registered many moons ago. If we can't register for free, that's gonna be the end of this tutorial.
I don't remember where they draw their lines between value and growth, large and small, but I believe they use different metrics than Fama and French, for example.
__________________ Favorite ERF quote: "I'm not going to waste my time on someone who's more interested in being stubborn or obtuse or intolerant." -- Nords Favorite ERF error message: "Sorry Nords is a moderator/admin and you are not allowed to ignore him or her."
__________________
I would not have anyone adopt my mode of living...but I would have each one be very careful to find out and pursue his own way, and not his father's or his mother's or his neighbor's instead. Thoreau, Walden
In a week or so at the end of this tutorial, you should be able to tell us why asset allocation is important, what your desired asset allocation is, and what your actual asset allocation is.
I am going to point you to a few web articles to read on risk, reward, and asset allocation. There are entire books written on the subject, but you can always read the books later if you want more info. To get you started, take a look at these links:
FundAdvice.com - The ultimate buy-and-hold strategy (This is Merriman and colleagues classic description of a slice-and-dice asset allocation. It is a relative short, but complete, article on the subject)
I don't think it matters which order you take to read the links. The purpose is simply to convince you that a portfolio of investments in various asset classes will give the most reward for a given risk level (or the least risk for a given reward level). You don't have to agree with everything in the articles, but I think the overall idea is compelling.
And just to add, some folks believe that investing in total stock market indexes is the way to go. That is passive/index low-cost investing at it's simplest. In post #32 in this thread, eridanus gives the 9-box style grid for a Total Stock Market index fund. Later on, we will compare that asset allocation to other allocations.
One of the first major decisions in your asset allocation is to decide how much fixed income and how much equities you wish to have. Your risk is theoretically reduced as your fixed income percentage goes up. First, let's figure out what you have now.
Homework: Use your M*/TRowePrice to enter and save your actual current portfolio. (Here's a link: T. Rowe Price: Interactive Tools). You can just enter current prices and current number of shares. You do not need to enter the actual transactions if you do not wish to.
Be sure to enter ALL your investable assets: your tax-deferred, your taxable, your 401k, your spouse's investments, etc.) When your portfolio is entered and saved, click on "Portfolio X-ray". Report what percentage (round off) you have for cash, bonds, domestic stocks, and foreign stocks.
Example: we are 8% cash, 21% bonds, 40% US stocks, and 31% foreign stocks.
(Future homework will require you to enter other portfolios for comparison.)
If anyone has other links on asset allocation that you find useful, please post them as well. You can even post some book titles that you found helpful.
I invest with T Rowe Price for my Roths and Rollovers
PRFDX
34 31 14
11 07 02
0 0 0
2 is % mid cap growth
whole T Rowe Portfolio for me is
20 18 12
07 09 20
02 04 08
Mid cap pool is 20%
Whole investment pool is
22 19 13
07 08 17
02 05 07
came out to 73% domestic, 21% international 4% bond 2% other/cash.
Target is 74% domestic/24% international 2% bond.
74% domestic should be
44% large cap
15% mid cap
15% small cap
24% international should be
15% large cap
9% small cap
2% bond is a hybrid (I own sprectrum income, which is a fund of funds for bonds).
I sell 1% of equites every 6 months to increase bond position by 1%.
__________________ Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
One of the first major decisions in your asset allocation is to decide how much fixed income and how much equities you wish to have. Your risk is theoretically reduced as your fixed income percentage goes up. First, let's figure out what you have now.
This is misleading. There is more than one kind of risk.
risk of principal loss
risk of inflation
interest rate risk
security risk
currency risk
government risk
income risk
corporate risk
return risk
and there are more (add other types of risk)...
The purpose of investing is not to eliminate risk. The goal is to manage risk. If you overweight one risk, you minimze another (whether on purpose or by accident). Eliminating principal risk brings up inflation risk for example. If you do not know a risk is there, or do not consider all types of risk, You could find possible problems.
The purpose of asset allocation is to manage corporate and return risks, while also thinking about principal risks, inflation risks, currency risks and other risks.
The goal is to be comfortable with each risk taken. When all risks are equal to your comfort level, then the portfolio is optimal.
For example, at age of 34, my biggest risk is inflation and return. Interest rates don't affect my decisions, as does need for my investments to supply my income. Principal risk I need to live with to get the return I want. But life now is about maximizing return.
I don't have corporate risk because I invest in mutual funds, which diversify this risk away.
I invest primarily in US (75% domestic, 25% international target allocation), so I dont have to worry much about currency risk or government risk.
Someone in retirement which owns some cash has interest rate risks, they have inflation and income risks as well. More factors need to be taken into account.
__________________ Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
Quote:
Linear Mode
