You've heard the term "asset allocation." What does it mean?
Perhaps you allocate your assets already, with the dollars in your 401(k) plan, Roth IRA, discount brokerage account, or all three. Do you ever say "most of my money is in a low expense S&P 500 index fund," "I restrict any informed speculation to 5% or less of my holdings," "I aim for at least 50% in high-yield stocks in a tax-advantaged account," or "I'm 100% in cash baby and don't you forget it!"? When you do, you announce something about how you allocate your investable assets to achieve a potential return at a given level of risk.
But asset allocation is a more defined, disciplined method for balancing return and risk. It's a specific way to choose a mix of asset classes in order to reduce the overall volatility -- swings -- in total portfolio value over time. Based on Modern Portfolio Theory, for which economist Harry Markowitz won the Nobel Prize, asset allocation is a strategy that responds in part to this exchange:
The Motley Fool: "Stocks have outperformed all other asset classes for rolling periods of 20 years or more since the 1920s, so just buy a low expense, broad market index fund (or a portfolio of a dozen or so well-chosen stocks) and invest for 20 years or more."
You: Sounds good, but what if I don't have 20 years for my particular investing goal? What about one, two, or five years? What about more than 20?
Answer: Using an asset allocation strategy, you invest in and rebalance among different types of stocks, bonds and other types of assets that tend to perform differently from each other for one purpose: To reduce risk that all the assets will perform the same way and leave you with far less money at the time you need it. In exchange for that reduced risk, you accept something less than the very highest -- and riskiest -- potential returns, but you sleep better.
In short, lower risk for more certainty -- keeping in mind that there's still risk and uncertainty.
Motley Fools at work for you!
We've spent Foolmonths (how many Fools working how many days... you get it) developing an entire seminar -- Perfect Your Portfolio: Asset Allocation for Long-Term Wealth -- on this theme. Just click on the title to learn more and register (now at a 20% discount).
If you sign up, you will enjoy lessons and online discussion with four great Motley Fools:
- Robert Brokamp (our personal finance guru and author of The Motley FoolGuide to Paying For School: How to Cover Education Costs from K to Ph.D..);
- Jeff Fischer, author of Investing Without a Silver Spoon: HowAnyone Can Build WealthThrough Direct Investing, winner of the very first Motley Fool stock-picking contest and the longest serving Fool writer and senior analyst;
- Mathew Emmert, the new Motley Fool Jimmy Neutron, boy genius (check out his columns),
- and me, the club mascot.
What's in it for you
We offer you asset allocation in the seminar this way: a clear, easy-to-understand presentation of important information you can use now. Lessons are delivered via email each Monday and Thursday. They start with the reasoning behind asset allocation, identify what assets are, and show you how to buy and sell the assets according to your own plan to achieve your goals. As you receive each lesson, read it, and do the exercises, you have exclusive access to private discussion boards where you can ask the instructors questions and share with other participants.
At the end of the seminar you will have a complete Portfolio Action Plan, with specific details on how to divvy up your assets, now and in the future. All participants also receive a free 30-day subscription to TMF Money Advisor, your own AAA for financial matters.
And as with all Foolish seminars, it comes with a money-back guarantee.
From readers -- and to them
Every time we Motley Fool writers analyze the news and companies, we enjoy the best benefit of Web publishing: quick responses from readers. Just last week I received a flood of very strong feedback -- pro and con -- about my short Take on just one possible indicator of how well homebuilders such as Toll Brothers
The longer I research businesses and invest in stocks for a living, the more I hear from readers frustrated by what passes for analysis today in the financial media. Many of them have taken their own energy to our Motley Fool community to share ideas about companies and investing. If you feel like they do, subscribe today or enjoy the painless free trial. While the friends you make and money you save will be their own rewards, we spice up life in the community with nights out on us for the best contributions, annual awards to the community's favorite members, contests, and more.
I'll be back next Tuesday to start a mid-year look at my progress following the portfolio allocation goals set out in these four columns:
- Reducing Risk: 2002 and Beyond (Portfolio allocation goals)
- A Buy and Two Sells (Using valuation to buy and sell)
- A Plan of Attack (Finding the bad news in financial statements, part 1)
- Hidden Red Flags (Finding the bad news in financial statements, part 2)
I'll be sharing reasons for specific buys, sells, and holds. Please join me. And have a most Foolish week!
Tom Jacobs (TMF Tom9) is prohibited where void, and available only in Alaska or Hawaii, depending on the season. His stocks are listed in his profile . Motley Fool writers are investors writing for investors .