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Basic Truths About Asset Allocation: A Consensus View Among the Experts

In terms of portfolio management, it is widely agreed that the asset allocation decision is the most important one an investor will make. How you split your investment funds among stocks, bonds, and cash (that is, short-term debt) is more important than your choice of stock mutual funds.

Experts, not surprisingly, do not always agree on the precise portfolio management allocations that different types of investors should adhere to. Yet, in comparing recommendations from published advisory sources, it is clear that there exists a broad consensus about the appropriate mix among stocks, bonds, and cash for most individuals during each stage of their life cycle. Of course, all portfolio management and asset allocation recommendations carry a disclaimer that individual circumstances may dictate a mix that is quite different.

Many individual investors, though, resemble at least roughly the "typical" investor profile. This article discusses some of the general portfolio management guidelines that can be gleaned from these broad recommendations for the "typical" investor. And it notes some of the special circumstances that could dictate an asset mix that differs from the consensus.

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Discussion

George from South Carolina posted over 2 years ago:

what about size of a retirees assets? for example a couple 75 years old with assets of 4 million and no debt,with modest spending,why should they not have a portfolio consistent with the age of their adult children?


Bill from Massachusetts posted over 2 years ago:

Overall the article provides sound advice... However from a subsistance stand point it might be prudent to separate the investments into 2 portfolios which each individually represent the creators portfolio requirements and the creators legacy requirements. End result: 2 portfolios which reflect two distinct sets of risk tolerance, time horizon, income needs and liquidity requirements.


Robert from Connecticut posted about 1 year ago:

The article is the conventional wisdom, but I would like to introduce the concept of "excess assets". By that I mean how far ahead or behind of the required assets to meet future obligations is the investor. A 55 year old with $100,000 is behind the curve and he must stay close to the conventional wisdom, but add a couple of zeros to his net worth and he should use the excess above his likely future needs to invest in stocks not bonds. An 80 year old living primarily on social secuirty is in a very different position than one who can't prudently spend all his net worth in the remaider of his life time.


Raymond from Virginia posted about 1 year ago:

When I read about asset allocation, I never see a discussion about how investment real estate can be factored into a portfolio. It's not a stock, not a bond , not cash but it is an important asset.

Any ideas?


James from Texas posted about 1 year ago:

Raymond, you might go to www.ifa.com and look at the allocation to real estate that they have in the portfolio that is close to your allocation and adjust accordingly.


James from Tennessee posted about 1 year ago:

The 3 main factors one should consider in deciding on his asset allocation and its rebalancing are:
1. The size of his assets and their liquidity.
2. The amount of cash they "throw off" each month (quarter, annually), relative to his total overall needs and to maintain or raise his standard of living.
3. The eventual disposition of remaining assets thru a revocable living trust, and the relative importance of leaving assets to heirs as opposed to spending down assets or even spending all the assets
4. His understanding of the market(s) and their implications, especially cyclical markets and the interplay among various world markets.
4, His "comfort zone"
5. The stability of his income from his employment, and additional iopportunities to increase his income, both during and after "retirement"
6. Avoiding fees as much as possible


Lee from Maryland posted about 1 year ago:

Another important area that neither this article nor previous comments covered is how to properly consider any significant pension (or similar) income. If the pension is fully adequate to live on, investments should be balanced for those who will inherit it. But how do you balance it if the pension will only cover half (or quarter, or two-thirds) of needs. And how to consider the inflation adjustment or lack thereof in the pension. It gets complicated. Is there a computer program available?


Jerry Shure from Georgia posted 8 months ago:

I agree with George. An individual or couple with assets that throw off more income than is spent each year can afford more risk even though there is already enough income. Hard to make generalizations since so much depends on desire to leave an estate to children. provide for emergencies, illness etc. And bonds also have risk depending on interest rates and
potential bankruptcies.


Jerry Shure from Georgia posted 8 months ago:

I agree with George. An individual or couple with assets that throw off more income than is spent each year can afford more risk even though there is already enough income. Hard to make generalizations since so much depends on desire to leave an estate to children. provide for emergencies, illness etc. And bonds also have risk depending on interest rates and
potential bankruptcies.


Robert Anderson from California posted 8 months ago:

All the conventional wisdom also ignores lifespan considerations. Being retired does usually require distributions from retirement savings, but the concept of shifting mostly to bonds is actually more risky at this juncture than a predominantly dividend stock based portfolio. If your expected age at death is 20 to 30 years in the future, the main portfolio risks are longevity risk and inflation risk, not volatility risk. Thinking you will liquidate your portfolio when the market is down is not likely if you are only taking 4% distributions. After a 30 year bull market in bonds, the risk of a long bear market in bonds is much more likely than a similar length stock bear market. There is no guarantee that a 40 year old will live longer than a 65 year old. The trajectory of stocks is usually up, but bonds currently are headed down, perhaps for years.


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