Asset Allocation
One of the most important things to plan when working with your retirement investments is your asset allocation. It’s also a funny thing, where people who swear all you want to do is match the market make their little tweaks hoping that they will beat the market. One of my favorite pieces of financial advice floating around are the “lazy” portfolios, so that is what I will talk about here.
The idea of diversification is to spread out your risk, so that when one part of your investment goes down it does not necessarily mean all of them will. Asset allocation is how much of your assets you spread between different investments. Since I am focused on retirement accounts for this article I will choose to ignore your house, possessions, automobiles, etc. Focus on money invested in accounts reserved for retirement.
The big basic choices are stocks, bonds, and cash type investments. Of course there are other types of investments, and there are many segments in every type, but we’ll make another assumption that we want simple and we want to track the broad markets. The next step, after defining what we are working with, is breaking down between the choices. To keep it simple we put a large chunk in stocks, a small chunk in bonds, and an even smaller chunk in cash. The idea is to match the broad markets. As you approach retirement and move through it you shift assets from stocks to bonds and cash. That is simple asset allocation.
Of course once that is said and done most people believe they should diversify further. They pick market segments they believe will beat the market, or choose between value and growth, or invest in different international markets. Those are all valid strategies. The problem is the reason people choose those investments and the arguments they use against other strategies. It’s funny that most of this strategy is done based on past performance and expected future performance, but always with the warning that none of that guarantees future results. It’s funny that “matching the market” would generally mean investing in a total stock market fund and leaving it at that. It’s funny that performance of a total stock market index, over the long term, are considered one of the the best standards and benchmarks. I guess going forward that just might not be good enough for some people?