Asset allocation tutorial?

[LOL!]

It looks like small cap growth is 0% of your portfolio. Do you wish to edit your homework?

 

[gettingthere]

Vanguard Star

24 23 32 LG
4 8 6 MED
1 1 2 SM

mid cap growth = 6 %

hmmmm... seems I need a lesson in how to post - can't seem to get it to look pretty.

 

[Darryl]

It looks like small cap growth is 0% of your portfolio. Do you wish to edit your homework?

Okay it looks like we just found out why I'm in this class.

How about 4% Mid Cap Growth

 

[twaddle]

If you want access to Morningstar's X-Ray without registering, try this:

Instant XRay entry page

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.

 

[smileydog]

American Funds Growth Fund
AGTHX

10 27 51
2 4 6
0 0 0

Thanks twaddle - used the link.

 

[RetireeRobert]

Methinks y'all are trying to open an account at TRowePrice. You need to simply register for the site. Try this link: https://www3.troweprice.com/aaweb1/accountAccess/publicRegister.do

OK thanks, I',m back on track. Answers:

Mainstay Small Cap Value Fund---MOPIX 0 0 0
4 8 4
47 33 4
And it "is" per Morningstar a smallcap value fund.

 

[eridanus]

Fidelity Total Stock Market Index

FSTMX

24 24 24
6 6 7
3 3 3

7% mid-sized growth

 

[Gotadimple]

Gabax

11 20 25
5 13 12
5 6 2

12%

 

[sunshine]

Vanguard Wellinton Admiral
VWENX

38 34 24
2 1 0
0 0 0

mid cap growth 0

 

[Sandy]

Fidelity Balanced (FBALX)

17 17 22
6 10 14
3 6 5

mid cap growth 14%

 

[REdreamn]

MDY

0 0 0
23 27 33
9 6 2

33% mid growth

 

[LOL!]

Alrighty, thanks for the participation.

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)

Travels on the Efficient Frontier: Investment Strategies for the 21st Century, by Frank Armstrong (this chapter discusses modern portfolio theory and portfolios of stocks and bonds)

The Asset Allocation Decision: Investment Strategies for the 21st Century, by Frank Armstrong (this chapter shows that more than 90% of the variation in the return of a portfolio is explained by the asset allocation)

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.)

 

[LOL!]

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.

 

[jIMOh]

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%.

 

[jIMOh]

Alrighty, thanks for the participation.


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.

 

[LOL!]

This is misleading. There is more than one kind of risk.

Absolutely, yes. For more on risk: Assessing the Risk: Investment Strategies for the 21st Century, by Frank Armstrong

But first, let's figure out what folks already have in their portfolios. It can be a big, time-consuming step to put all of one's portfolio into the M* tool.

 

[Darryl]

Currently

Cash 26%
U.S. Stocks 47
Foreign Stks 19
Bonds 8

Target
Cash 10%
U.S. Stock 50
Foreign Stk 25
Bonds 15

 

[ats5g]

More Asset Allocation links:

From Rick Ferri The Asset Allocation Question, and his book All About Asset Allocation.

- Alec

 

[KM]

Cash - 2.45%
US Stocks - 52.57%
Foreign Stocks - 17.43%
Bonds - 23.75%
Other - 3.80%

DH and I also have 401ks, but I'm not sure how to enter them, as none of the funds we choose have ticker symbols. They are only listed as Large Equity, Income, Mid-Cap Index, etc.....

 

[LOL!]

DH and I also have 401ks, but I'm not sure how to enter them, as none of the funds we choose have ticker symbols. They are only listed as Large Equity, Income, Mid-Cap Index, etc.....

What I did for investments like that is find a close proxy that did have a ticker symbol. I had to read the fund prospectus though. Example: for a "Mid-Cap Index" I would use the ticker symbol MDY and just plug in enough shares of MDY to cover my total investment in the mid-cap index fund in the 401k.

 

[Siv]

This is interesting.

How do I participate if I don't live in US and my investment is all over the world? Will it be possible? If it is, count me in.

 

[calmloki]

OOOooo. Time to learn!
TRP reports this on our portfolio:

9.7% cash
66.8% US stock
17% foreign stock
6.1% bonds

10 56 19
2 3 3
3 1 2

3% midcap growth

Have a lot to learn about asset allocation - feel like we need to move into a more passive type of income, but we're currently tiny investors: we have a little less than 4 times our porfolio loaned out in property loans, 6 times the portfolio in money markets or CDs, and about 17 times the portfolio in rental property. Oh yeah - we need some diversity! Even in the portfolio our foreign stock percentage is all from 2 stocks: gold in BGEIX and Canadian coal in FDG.

 

[sunshine]

current
29% cash
27% US stock
15% foreign stock
22% bonds
7% other

target
10% cash
50% US stock
28% foreign stock
12% bond

 

[jIMOh]

OOOooo. Time to learn!
TRP reports this on our portfolio:

9.7% cash
66.8% US stock
17% foreign stock
6.1% bonds

10 56 19
2 3 3
3 1 2

3% midcap growth

Have a lot to learn about asset allocation - feel like we need to move into a more passive type of income, but we're currently tiny investors: we have a little less than 4 times our porfolio loaned out in property loans, 6 times the portfolio in money markets or CDs, and about 17 times the portfolio in rental property. Oh yeah - we need some diversity! Even in the portfolio our foreign stock percentage is all from 2 stocks: gold in BGEIX and Canadian coal in FDG.

This is a good example of someone which could use some assistance.

6 times portfolio in money markets "might not make sense"... but then you also have rental units.

Compare portfolio size to income (for example my portfolio is 3X my income) and I have 3 months expenses in CDs.

What is the net "income" from the rental units? Do you spend this or invest this?

In addition, I would look to add a small cap fund and a mid cap fund to whatever it is you hold. You clearly have a good large cap fund or two in your investment portfolio.

 

[Gotadimple]

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.)

Cash 19.04%
Bonds 19.98
US Stocks 47.72
Internatl 11.96