There are many, many things to consider as you build wealth for the future. The most important -- whether retirement is just around the corner or decades away -- is neatly summed up by my friend and fellow Fool Robert Brokamp: "Get your assets in gear."
Park your assets
If you're a typical reader, asset allocation is one of the most pressing issues in your financial life. The top questions we receive take these forms: How much should I put in stocks and how much in bonds? Should I buy real estate? How did Full House manage to stay on the air for eight years?
We can't help you with that last one, but Robert -- who heads up the Motley Fool Rule Your Retirement service -- says that your age and risk tolerance determine your allocation situation.
"The good news is, once you've identified just how you feel about risk," says Robert, "you're well on your way to choosing a portfolio that will maximize your returns according to that comfort level."
If you do just one thing today ...
You should determine your risk profile and see if your allocation is aligned with it.
You may know right off the bat whether your risk level is conservative, moderate, or aggressive -- or you may have no clue. But whatever you wind up deciding will determine your proper asset allocation. Here are the recommended investments in each asset class from the Rule Your Retirement website:
|
Asset Class |
Conservative |
Moderate |
Aggressive |
|---|---|---|---|
|
Large-cap stocks |
20% |
35% |
50% |
|
Small-cap stocks |
5% |
10% |
15% |
|
Foreign stocks |
5% |
5% |
10% |
|
Bonds |
60% |
40% |
20% |
|
REITs |
10% |
10% |
5% |
The closer you are to retirement, and the lower your risk profile, the more money you should have in bonds. The next greatest percentage will go to lower-risk, large stocks. Big firms such as Berkshire Hathaway (NYSE:BRK-A) and McDonald's (NYSE:MCD) have been around for a long time, and will likely continue to be among the strongest companies in the world for quite a while.
The more aggressive you tilt on the risk scale, the more we recommend getting some small companies into your port. These small fries can really outperform the big guys when things are going well. For example, Intel (+67%) and PepsiCo (NYSE:PEP) (+160%) are on the top 20 list of the best-performing large caps over the past 10 years.
But while no large company exceeded 240% returns, the 20 top-performing small caps -- firms with a market cap below $2 billion a decade ago -- have all gained more than 1,000%. These include stars as Apple (NASDAQ:AAPL) (+5,306%), Guess? (NYSE:GES) (+1,054%), and XTO Energy (NYSE:XTO) (+2,251).
However, the risk in such companies is great; wild swings are the name of the game, and drops of 50% or more are common in small-cap-land.
Taking the first step
Today, why not get on track and determine your risk profile so you can begin properly aligning your portfolio? In its asset-allocation section, the Rule Your Retirement service features a five-question Risk Tolerance Profiler to help you determine where you stand. In addition, Robert highlights specific investments for each profile.
That, and the entire Rule Your Retirement service, is available to you free for 30 days. I highly recommend it.
This article was first published June 12, 2007. It has been updated.
Rex Moore's favorite JFK quote is: "Why does Rice play Texas?" At the time of publication, he owned shares of Berkshire Hathaway. The Motley Fool also owns shares of Berkshire Hathaway. Berkshire and Intel are Motley Fool Inside Value recommendations. Berkshire is also a Stock Advisor pick. The Fool has a disclosure policy.
