The Asset Allocation Style of Investing

March 17 20 Comments latest by Martins Duke

Kent E. Irwin is the President and Co-Founder of eFinplan, LLC, the first online comprehensive financial planning software for consumers. He is also a Chartered Financial Consultant (ChFC), a Chartered Advisor in Philanthropy (CAP) and a Chartered Life Underwriter (CLU).

There are three ways to invest money, and the most boring way works best for most people: Asset Allocation.

The other two ways to invest: market timing or picking stocks are more sexy. Next time investing comes up at a cocktail party you will be sure to hear someone touting their get rich quick hot stock. When interest rates soar, or stocks drop you may even hear someone brag about how they got in or out at just the right time, or used some type of ‘option’ strategy and made a bundle. You will see people interested in these types of conversations, because many people’s investment portfolios have not performed well.

Most people are not good at picking stocks, even with the internet and greater access to information than ever, there are too many stocks and too little information about each one – and it gets outdated quickly. People are emotional. Even if they pick good ones, they often sell them at the wrong time, because their fears overtake their ability to objectively make decisions.

Market timing always becomes popular when the stock market drops, and people see their account values dropping as they are now. No one has consistently shown the ability to predict markets or securities. To win you have to have 60% accuracy just to cover the losses caused by mistakes of the other 40% - because of transaction fees and taxes. You have to be correct in all four decisions: what/when to buy and when/what to sell.

You are sure to put a damper on a party conversation by mentioning ‘asset allocation.’

What is asset allocation? It is the method of investing based on the study by Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower in 1991. They found that over 91% of long-term portfolio performance is derived from the decisions made regarding asset allocation, and not market timing or security selection. This traditional buy and hold method is boring – but it works.

When you asset allocate you invest a portion of your money into each of the major asset classes: Cash, Bonds, and Stocks. When it comes to your stock portion you split or allocate it into Large Cap, Mid Cap, Small Cap and Foreign Stock.

If you are conservative you allocate a greater percentage into cash and bonds and large cap stock. If you are aggressive your allocation has less cash and bond and more mid, small and foreign stock. Aggressive allocations will probably have a better rate of return over time than going conservative, but will be the most volatile, meaning your values will fluctuate up and down more. You can pick a model like the ones below or take a quiz utilizing software to help identify your tolerance for handling risk.

I have designed 5 fictitious model portfolios to help demonstrate different risk levels. I call the most conservative the ‘Volvo portfolio’. The ‘Volvo portfolio’ fits you because you want something solid (good rate of return) and protection from market risk. The ‘Lexus portfolio’ is for those you are conservative but want more speed (little better rate of return), but you still like a smooth ride. The ‘Acura portfolio’ fits those who want a little more sport (higher rate of return), and are willing to encounter a little more risk. Riskier investors may choose the ‘BMW portfolio’, to get great performance (higher rate of return), and because they can tolerate tricky roads (a lot of market fluctuation). Lastly, the ‘Porsche is for those who want maximum performance, and whose nerves can tolerate the riskiest of roads. This fictitious demonstration was done with premium cars, because investing with asset allocation over the very long term will hopefully position you to be able to eventually afford one. In conclusion, neither of these asset allocation models would be considered at the upper end of the high risk continuum. As you progress from conservative to aggressive asset allocation models, you increase your probability for volatility and rate of return, but not by wide margins over the long term.

‘The Volvo’ - Very Conservative
Cash 10
Bonds 50
Large Cap Stock 20
Mid Cap Stock 10
Small Cap Stock 5
Foreign Stock 5

‘The Lexus’ - Conservative
Cash 7.5
Bonds 40
Large Cap Stock 25
Mid Cap Stock 12.5
Small Cap Stock 7.5
Foreign Stock 7.5

‘The Acura’ - Moderate
Cash 5
Bonds 30
Large Cap Stock 30
Mid Cap Stock 10
Small Cap Stock 10
Foreign Stock 15

‘The BMW’ - Aggressive
Cash 2.5
Bonds 20
Large Cap Stock 35
Mid Cap Stock 15
Small Cap Stock 12.5
Foreign Stock 15

‘The Porsche’ - Very Aggressive
Cash 0
Bonds 10
Large Cap Stock 37.5
Mid Cap Stock 20
Small Cap Stock 15
Foreign Stock 17.5

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20 Comments latest by Martins Duke

If you’re in Mumbai, let me know

March 17 14 Comments latest by FRANCIS SEQUIERA

I’m writing from Mumbai, India, and just wanted to post a quick note: If you’re in Mumbai and want to meet up, send me an email or post a comment here.

I’ll be going on the Dharavi slum tour tomorrow and then have some time this week to wander around and meet up.

The rest of my trip here has been awesome. I went to a wedding with ~500 people (it was like something off of MTV’s My Sweet 16, only classier). Indian people don’t let you stay hungry, so I ate more ghee-filled food than any normal man ever should. As for the shopping, I’ve roamed the markets in Delhi and Mumbai to negotiate with street merchants in broken Punjabi. And no, the wedding wasn’t mine.

I’ll be back in a week or so. Until then, there are more guest posts coming up.

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14 Comments latest by FRANCIS SEQUIERA

How to make splurging on a digital camera pay for itself over and over again

March 16 17 Comments latest by Airport, Travel Industry, & Airport Parking Weekly Link Roundup: March 24, 2008

This is a guest post by Boston Gal, from Boston Gal’s Open Wallet, a single 30-something Bostonian who is seeking enlightenment and control of her Net Worth.

This past August my 5 year old Kodak digital camera finally stopped working (it may have had something to do with my dropping it on the pavement – twice) and I splurged on a new Panasonic Lumix camera and 2GB card for $180.70 (yes, I checked, and that is how much I spent!) When I say splurge, I mean I could have purchased a cheaper camera – something for about half the price, but when I considered how many ways I put my digital camera to work, paying more for better quality and features seemed easily justifiable.

My digital camera has frequently been pressed into service as my photo copier. Just tack a document up on a cork board at eye level, take a high resolution photo, download to desktop and print. Yes, a bit complicated, but when you don’t have a copier or a scanner handy the digital camera is a great record keeper (just ask any 1950’s or 60’s spy who used to do this with a camera concealed in a lipstick tube).

I used my digital camera recently to successfully fight a parking ticket. A meter maid had the audacity to ticket me when I still had a few minutes left. Lucky for me I had the camera in my car and took a few stills of the time and used the little movie feature to record the scene. My appeal, complete with photos and link to video was approved and the city of Boston did not get my $25. Right there I saved myself enough to cover the price of the 2 GB card.

Lastly, before I leave you with a bulleted list of other ways you can put your digital camera to work for you, I recently discovered a time saving tip. When heading off on a trip, I took a few moments to use my digital camera to document my parking space location at central airport parking. This time, when I returned from my trip, instead of wondering around trying to remember which level I had parked on, I was able to quickly scroll back through my trip photos to find the ones directing me to my car. That experience alone makes my new digital camera worth almost any cost!

Now for the promised list:

• Document the contents of your home for insurance purposes (or document your friend’s house with the much better furniture and stuff in it – kidding!)

• Take photos of your treasures to sell on EBay or Craigslist (anyone interested in a once-functioning Kodak digital camera?)

• As a way of peering into dark corners you might not want to stick your face into (is that a bat up in that eave? Let’s let the digital camera’s telephoto lens and strong flash take a look-see…)

• Moving and need to remember what you put in the boxes but don’t want to mark the outside of the cartons being handled by strangers with revealing notes such as “family treasures”, “underwear”, or “contents of medicine cabinet” – then document them with photos and just number the boxes to correspond.

• Getting ready to tackle a repair which requires that you take apart a multi-piece device and not sure you will remember how to reassemble? Take photos as you remove each piece to give yourself a visual breadcrumb trail to follow when putting it back together.

If you have additional tips or ideas leave them in the comments!

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17 Comments latest by Airport, Travel Industry, & Airport Parking Weekly Link Roundup: March 24, 2008

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