While this post, “Investment Allocation for 2008 – Need Advice?”, is from 2008 it still has valid information. There are many factors that should be considered when determining your investment allocation. This post addresses them. There are also additional links that can help you determine your own personal investment allocation.

 

I need help determining my correct allocation. I have about 60K in a work 401K plan.

Before last years election I took some gains off the table and invested 20K in cash and fixed income. The rest of my portfolio is split evenly amount smal caps, growth, and Foreign Investments.

I have two questions. Assuming we get a bounce and the Dow holds at 12K is now the time to move money from cash into equities?

My second question is at age 30 what should my target allocation be for 2008. How much in value, growth, and etc..

Any answer will be appreciated.

Free Retirement Plan - Investment Allocation

Free Retirement Plan – Investment Allocation

Free Retirement Plan – Steps To Determine Your Investment Allocation

Most people want to make more money with their investments but few know where to start. The question above was asked and there are some really simple answers to a complex question. Still this does not mean that the answers are easy and will not take some effort on your part. So let’s take some time to look at the Steps To Determine Your Investment Allocation.

Free Retirement Plan – Steps To Determine Your Investment Allocation – Step #1 – What Is The Time Horizon Before You Will Need The Money:

When you are going to need the money that you are investing is important. The longer the time frame the more risk you can assume. If this money is for emergencies the money should be in cash. An account that is FDIC insured would be best. While you will not earn very much in interest the money will be there when you need it. Liquidity is very important for emergency money. Another example would be the down payment for an upcoming purchase i.e. down payment for a home or car. So if you are going to need the money in 5 years or less than safe investment such as certificates of deposit (CDs), bonds or some form of government treasury note is best. If the money is not needed for more than 5 years than stocks in some percentage will be appropriate. All investments carry risk and the higher the risk the higher the potential return but that is not a guarantee.

Free Retirement Plan – Steps To Determine Your Investment Allocation – Step #2 – What Is The Time Horizon That The Money Will Be Needed:

Money has to last different lengths of time. Money that is needed for current income during retirement CAN’T run out. If it does then you will be working at your local store telling people welcome. This would not be too much fun at age 80. People are living longer and longer so longevity risk is very real. There are also times when the money is not needed for a long period. College funds or funds that are going to be used to supplement a part-time situation. Some people will work part-time in the early years of retirement. This money has a fixed time period. All money needs are not created equal so make sure that you are aware of this.

Free Retirement Plan – Steps To Determine Your Investment Allocation – Step #3 – What Is Your Investment Tolerance:

This is something that people have trouble with. Most people want to make as much money as possible. When they see that someone else is making more on their money then they become envious. They will contact their advisor, if they have one, and tell them to change their investment allocation to match the one that their friend is using. The problem is that in most cases with greater returns comes greater risk. This is a tool developed by William Bernstein, The Intelligent Asset Allocator, to help you determine how much you should have in stocks.

I can tolerate losing ______% of my portfolio in the course of earning higher returns                                         Recommended % of portfolio invested in stocks

35%                                                                                                                                                                                                                            80%

30%                                                                                                                                                                                                                            70%

25%                                                                                                                                                                                                                             60%

20%                                                                                                                                                                                                                             50%

15%                                                                                                                                                                                                                             40%

10%                                                                                                                                                                                                                             30%

5%                                                                                                                                                                                                                               20%

0%                                                                                                                                                                                                                               10%

Be aware that these numbers could change as your portfolio grows and / or you get closer to retirement age. You reevaluate this number on an annual basis. For example if you only have $1,000 in your account then losing 50% might not be a big deal to you. If on the other hand you have $1,000,000 in your account then losing 50% or $500,000 might not feel as good. Another rule of thumb is the rule of 100. Take your age from 100 and that will tell you the % of your investments that at max should be in stocks. Still these are both guidelines. You have to use what feels right for your situation.

Disclosure

Investopedia – 6 Investment Allocations That Work

The Motley Fool – Rules For Determining Your Investment Allocation
Get Adobe Flash player