Despite years of dispensing financial guidance, I only recently learned just how important asset allocation can be.
Asset allocation simply involves how you want to invest your money -- all in one place, all in stocks, partly in stocks and partly in bonds, etc. Without it, you risk placing all your proverbial eggs in a single market basket, leaving your money especially vulnerable if that sector takes a hit.
Many researchers have tried to measure how greatly asset allocation influences our investment performance. Here's some of what they've found:
- According to two studies led by Gary Brinson, more than 90% of the variability in retirement plan sponsors' performance over time owes to asset allocation.
- Roger Ibbotson and Paul Kaplan found that allocation accounts for about 40% of the variation in return among various mutual funds.
- They also found that almost 100% of a fund's returns come from how it allocates its assets.
Clearly, asset allocation is no trifling matter.
Decide how to proceed
It's not difficult to determine the allocation model that works best for you. However, it does take a little work to update your portfolio every now and then, keeping it in balance as asset classes surge or sink.
If you'd rather avoid that effort, consider "target-date" mutual funds, which tend to the allocation for you, shifting it over time as you near retirement. Or check out our Rule Your Retirement newsletter, where Robert Brokamp lays out allocation models for three kinds of investors. Here they are in a nutshell:
Asset Class |
Typical Companies |
More Than 10 Years From Retirement |
Within 10 Years of Retirement |
In Retirement |
---|---|---|---|---|
Large-cap stocks |
Occidental Petroleum |
35% |
30% |
20% |
Mid-cap stocks |
Joy Global |
15% |
10% |
7% |
Small-cap stocks |
American Science & Engineering |
15% |
10% |
7% |
International stocks |
Nokia, Infosys |
25% |
15% |
10% |
Bonds |
Various Treasury, agency, and corporate bond issues |
10% |
35% |
56% |
Source: Rule Your Retirement.
If you'd like more information, and specific fund recommendations for each model portfolio, you can try Rule Your Retirement free for 30 days.
However you choose to do so, make sure you've got some kind of asset allocation strategy in place for your portfolio. A little effort now could pay off big time when you retire.
Got a strategy that works great for you? Tell us all about it in the comments box below.