Menu #34: Three easy asset allocation strategies for every investor

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48% of young adults use TikTok to keep up with politics and 52% use the social platform for general news. (Source: Pew Research)

818,000 downward revisions to U.S. payrolls, the largest since 2009, have sparked debate about whether they signal a recession. In 2009, similar revisions coincided with already declared recession conditions, marked by soaring jobless claims and negative GDP for four consecutive quarters. (Source: Bay Area Times) 

3.95 million units was the seasonally adjusted annual rate of U.S. existing home sales in July, reflecting a 1.3% increase after four months of decline. This exceeded economists' expectations of 3.93 million units, fueled by better supply and falling mortgage rates. The increase signals a possible rebound in housing activity in the near future. (Source: FRED)

DEEP DISH 🍕

Three easy asset allocation strategies for every investor

Navigating investments can be overwhelming. Asset allocation offers a guiding framework to help us make informed investment decisions. Here's a closer look:

The Core Elements - Stocks, Bonds, & Cash:

Stocks: They have a history of high returns, but with that comes increased risk. Think of them as the adventurous path on our journey. Rather than investing in individual stocks, we recommend investing in mutual funds, index funds or ETFs.

Bonds: While they offer more stability, bonds have historically provided lower returns compared to stocks.

Cash and Cash Equivalents: While many don't view cash assets as traditional investments, they offer a sanctuary of low risk.

Starting Your Investment Journey: For those new to investing, it could be overwhelming to think about all the investment vehicles available to us. When designing your portfolio it’s important to chose the best mix of investment vehicles based on your goals, age and risk tolerance.

1. Guided by Goals: Every financial decision has a purpose behind it. If you're saving for a significant milestone, like purchasing a car in two years, you'd naturally lean more towards stable assets like cash or cash alternatives. This ensures market fluctuations don't disrupt your plans. On the other side, if you're aiming for a long-term goal, like purchasing a vacation home within the next 7-10 years, you might be inclined to invest money in the stock market.

2. Shaped by Age: Your age acts as a timeline for your financial objectives. If retirement is several decades away, stocks might dominate your portfolio due to their growth potential. However, as retirement draws closer, a shift towards safer assets like bonds and cash equivalents becomes logical.

3. Defined by Risk Tolerance: Understanding your comfort with risk is paramount. If market volatility makes you anxious, a more conservative approach might be your best path. The financial market has its ups and downs, and being aware of your emotional response to these fluctuations is crucial.

Crafting the Details:

Once you have a good understanding of your financial goals, time horizon, and risk tolerance, then you can consider the finer details to help define your asset allocation.

Portfolio Allocation: Think of your portfolio as a mosaic, with each account being a tile. They don't all need to have the same design. Retirement accounts might have bold patterns (aggressive investments) because you have time on your side, while regular taxable accounts might have more subdued tones (conservative investments) as they're meant for nearer-term needs.

Diversification: Once you've set the broad strokes, it's time to add details. This means choosing stocks or bonds based on various factors like geography (e.g., U.S., emerging markets, developed markets etc.), industry (technology, healthcare, real estate etc.), or company size (e.g., large-cap, mid-cap, small-cap).

Three Easy Asset Allocation strategies

Not everyone wants to spend a lot of time or effort pouring over which funds to invest in. Fortunately, there are three easy asset allocation strategies that can work for most people:

1. One-Fund Portfolio: A single target-date fund can simplify things. It's diverse, adjusts over time, and is ideal for those who prefer a hands-off approach. For instance, if you intend to retire in 2050, a 2050 target-date fund would automatically allocate your assets (between stocks, bonds and cash equivalents) with that year in mind. It will also adjust your allocation over time, becoming more conservative as 2050 nears. Most 401(k) plans offer target-date retirement funds.

2. Two-Fund Portfolio: For those seeking more control, a two-fund portfolio offers flexibility. A total market index fund for stocks and a bond index fund for bonds can be a balanced duo. For instance, you could put your stock allocation into a total market index fund that covers both U.S. and international companies. You could then put the portion allocated to bonds in a total bond index fund. This portfolio makes it extremely easy to implement the stock/bond allocation you prefer.

3. Three-Fund Portfolio: The trio of U.S. stocks (i.e., mutual or index funds), international stocks, and bonds offers even more precision, enabling you to fine-tune your allocations further. With this model portfolio, the stock allocation is divided between two mutual funds, one covering U.S. stocks and the other covering international stocks. This provides additional control over how much of the stock allocation goes to U.S. companies and how much is invested in overseas firms.

Our lives are dynamic, and our finances should reflect that. As life evolves, and market tides ebb and flow, your asset allocation will shift. It is important to periodically revisit your investments to ensure that they are align with your goals, time-horizon, and risk tolerance.

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