by Andrew Horowitz.
Today on “Money Girl” I will be discussing the importance of asset allocation and how it alone can shape your financial future.
Do you want to start investing but don’t know where to start? Are you already investing but think that your portfolio has too much volatility?
A listener writes in:
I have a 401k plan, a few bank accounts, mutual funds and some real estate. It seems that all of my investments are going down on a regular basis, and I hate to open the mail when it is statement time. How can I put together a plan that so I can stop worrying about? It is really starting to get to me.
Thanks for your question. It is a great one… and very timely…
Let’s start you off with one of those fancy financial terms, break it apart, and then figure out how we can make it work for your situation.
Asset Allocation
The term: Asset allocation. This is probably one of the most important parts of the portfolio planning process. Your portfolio needs to be a mix of several different asset classes, many different investment vehicles and different types of industries. These can include things like money markets, bonds, stocks, real estate, precious metals , luxury items and maybe even foreign currencies.
If we roll up our sleeves a bit and delve even deeper into the portfolio logistics we can further separate each asset into classes by size … large cap, mid cap and small cap, as well style… growth, blend, or value.
What is in your portfolio is a matter of personal preference and should be carefully planned to weigh out the amount of risk that you are willing to accept. But as long as you have an Asset Allocation roadmap planned out, that part is much easier.
Maintain a Diversified Portfolio
The one word you will likely hear most when talking or reading about asset allocation is diversification. Basically it’s just another one of those fancy financial terms that simply means spreading your assets out amongst various different sectors and classes in order to reduce risk.
So, why should you have a diversified portfolio? Wouldn’t it be just better to jump in on a hot stock and put all your money into that? Or maybe even buy a few parcels of land and develop that? The short answer is that it is rare that any two markets will be soaring at the same time. Thus you might have all your money in real estate and the market tanks (like it just did). What then? Not a pretty picture.
By diversifying your portfolio you are reducing the risk of loss during market set backs. If one market fails, well it's okay, because you still have another group of asset classes that will hold up. And chances are that while one may be in trouble; another one will be moving up in value.
In my book, The Disciplined Investor, I talk about a portfolio and compare it to a flower garden. If your garden is full impatiens, it will look gorgeous when in full bloom. But if you live in Florida, like me, during the summer they will be a dead pile of rotting muck. On the other hand, if you have a garden with some impatiens, some rose bushes, and even a few evergreens (like money markets) and maybe a few annuals and perennials, something is sure to be in bloom at any given time of the year. That is how your portfolio should be as well. The trick is to have investments with different risks and styles, sectors, and in different regions to allow for profits to bloom over time. Manage Your Investment Time Frame
Another important factor to consider in planning your Asset Allocation is your time frame. Are these investments going to be lifelong commitments or do you plan on changing or trading them throughout the year? The longer your projected time line is, the more risk you can take because you’ll be able to wait out the various investment cycles. The asset allocation process helps you weed and feed your garden. So if one asset drops you may want to bring that back into alignment by shifting monies into the lower cost ones. Since you may be in no rush to withdraw your money, it will have a plenty of time to recover and your lower basis may help to add profits down the road.
This type of disciplined investment process can have some amazing long-term benefits and set up a happy retirement if properly planned and tended to. Remember, asset allocation is one of the first and one of the most important components when planning your portfolio strategy. It has been proven that what’s in your portfolio is important, but not nearly as important as your diversification and the division of assets.
Cha-Ching …and that’s all for now. Courtesy of Andrew Horowitz, QDT's Winning Investor and guest host of Money Girl’s Tips for a Richer Life. Thanks for tuning in to “Money Girl”. And thanks to Bill and Lilach for sending in questions on Asset Allocation. We are going to send you a copy of my book, for helping is with this episode. This is Andrew Horowitz sitting in for The Money Girl. Listen to my other weekly podcast, The Disciplined Investor, which is also available on iTunes.
More information on Asset Allocation and how to balance your portfolio is available on the Quick and Dirty Tips Website.
As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.
Thanks for listening!
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