Asset Allocation – Why It Matters

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Asset Allocation

Before I became a financial advisor, despite having worked in the financial services industry, I had no idea what asset allocation was and why it meant anything to me. While I was working at my previous company, we shared research that showed that 90% of performance returns were based on asset allocation while only 10% were based on the actual assets you picked (individual stocks vs. ETFs vs. mutual funds, etc).

It’s crazy to think that this is such an important conversation topic in investing and yet most investors have no idea what their asset allocation is or what it should be for the goals that they have. In this episode, Wendy and Eric from DIY Fund are back to talk about the importance of asset allocation and why it matters.

Shot of the Day

Lemon Drop

PODCAST NOTES

  • Shannon describes asset allocation as a pie, where the mix of all the pie ingredients is the same as the mix of assets in a portfolio.
  • What percentage of stocks, bonds, cash do you need to have for what you want to do?
  • Each asset allocation mix has a different message, and you want to make sure the message of your asset allocation is the right one for you.
  • Some examples of asset allocation mixes are an aggressive allocation, a moderate allocation, and a conservative allocation.
  • Most people don’t realize what their portfolio is saying because they don’t know what their asset allocation is.
  • Having no allocation in your portfolio is the biggest investing risk.
  • When you pay an advisor to manage your assets, you’re really paying them to put together your portfolio in different buckets and to manage those buckets (asset allocation).
  • At the end of the day, you can do that yourself!
  • A retirement portfolio’s allocation mix should scream aggressive.
  • A good rule of thumb is if you are investing long-term (10 years or more), you should have 80% stocks and 20% bonds.
  • Intermediate goals (2-10year goals) should have an asset allocation of 50% stocks and 50% bonds–moderate allocation mix.
  • Near-term goals (2 years or less) will be comprised of a lot more bonds and cash–conservative allocation mix.
  • DIY Fund provides tools and resources for you to look at your overall portfolios and see what your asset allocation is.
  • Buying an ETF helps make allocation decisions for you, but it is important to understand the ETF you purchased.
  • By understanding asset allocation, you can rebalance your portfolios when situations arise.
  • If your investment account is outside of a tax-protected environment, there are tax implications for rebalancing.
  • You should evaluate your portfolios quarterly.
  • Target-Date funds tend to outperform other investments because they are based on asset allocation.

TAKEAWAYS

  • Asset allocation is not as complicated as it sounds.
  • 90% of your portfolio returns are based on asset allocation.
  • You must pick the right asset allocation mix for your specific goals (long-term, intermediate, short-term) to have your portfolio do what it should.
  • Remember, stick to the mix you set at the beginning of your investing journey!

Do you understand asset allocation? Do you know your asset allocation for your investments? 

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Shannon is a financial planner who left a “traditional” financial services firm to start her own company, The Financial Gym, because she felt traditional financial services firms did not have the tools or resources to help people in their 20s and 30s who are starting out and trying to build assets while also managing debt. She realized that the key to long-term personal financial success is a commitment to financial fitness and making smart financial choices. Through her blog, Financially Blonde, her book, Train Your Way To Financial Fitness, her podcast, Martinis and Your Money and The Financial Gym, Shannon is committed to making financial fitness fun, easy and accessible for everyone.

4 COMMENTS

  1. Great podcast Shannon!! This is an area I know I am personally deficient in. I’ve grown a sizable portfolio in life and trying to consolidate and form an asset allocation across an Etrade account, Vanguard Brokerage, Traditional IRA, Roth IRA, Fidelity 401K, Fidelity HSA… It becomes a mess when trying to get everything in sync with the overall target portfolio. 2016 is my year to focus on that and getting my complete portfolio aligned with my target mix allocation.

    cheers!!!

    I’m not sure if you plan to cover topics such at tax strategy among various asset classes with respect to what type of account you hold them. A lot of the Bogleheads and vanguard followers do this. The challenge I find is it works fine with everything at Vanguard, but my outside investments or 401K etc. makes it more challenging to determine the best overall holdings in each account. It also becomes quite tricky to rebalance since you can’t obviously do this between different providers of accounts you have to have a plan to rebalance those investments in that single account.

    Thanks again,
    Tim

  2. Hi-
    I am Wendy (DIY.FUND)’s Mom…
    I learned SO much…Really enjoyed the ETF/Mutual Fund discussion!
    Thank you for your insight into the contrast between ETFs and Mutual Funds.

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