Asset Allocations for the Typical Investor
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No matter what type of investor you are, there is one truth that all investors need to figure out before they step in to action. Everyone makes the decision – some just do not know they are doing it. This decision is what the asset allocation of your portfolio will be. It will determine the success of your portfolio over the years, and therefore requires some attention.
I came across a good article at the AAII that lists a number of what they call “the basic truths” of portfolio management and asset allocation. As part of the research for the article, the authors researched four organizations to determine what the broad consensus was for the typical asset allocation models. They broke the asset allocations down four investor types, including High-Risk Investors/ Young Investors, Medium Risk Investors/Investors Approaching Retirement, Low-Risk Investors/Retiring Investors and Retirees, and Investors over age 70. Here is the table they put together:
Click to EnlargeHow should investors use a table like this? My suggestion would be to use this as a start and a general guideline to start and then do more research to nail down your true risk profile and fine tune from there. Go more conservative than you think – this will help you manage your emotions better. The most important thing – pick an asset allocation and stick with it. Do that before you buy your next dividend stock!
6 Comments on this post
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Darwin's Finance said:
Great stuff;
Another consideration is that investors would be best served in avoiding holding their own company stock. I had done some 401K asset allocation posts a while back indicating how US worker aggregates stack up and it’s pretty disturbing. Not only are you tied to your employer from an income standpoint, and also possibly from a stock option/restricted stock standpoint, but now in your 401K as well? Diversification is the key, not just in stock holdings, but in all facets of income.February 9th, 2009 at 12:11 pm -
Manshu said:
Asset allocation has something to do with relative asset prices also. There was a time when I had all my savings in stocks. And then there was a time when I had 50% in cashj and 50% in stocks. Relative price levels need to be considered while allocating assets as well.
February 9th, 2009 at 7:04 pm -
Brian said:
In the Intelligent Asset Allocator, I read that you get the most benifit from diversification when you diversify with “non-correlating” asset classes. Interestingly enough the addition of 10% bond allocation (90% stock) actually increases the potential return, while reducing risk.
February 10th, 2009 at 9:14 am -
CanadianInvestor said:
Consider a retired teacher with a 70% of final salary DB pension that more than covers all spending needs in retirement. Why would that person need any fixed income in a portfolio? Their pension is already fixed income and inflation-indexed to boot.
February 20th, 2009 at 4:35 pm
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