Let's face it, you're on a roll. After getting down to your attorney's office to sign the new Living Trust and then diligently tracking down your assets to fund the trust, you should be congratulated. You're one of the responsible ones - 70% of the people who die each year in the United States haven't even bothered to get a will. Frankly, you're an inspiration to us all. But to seal the nomination for the financial Oscars, a little work on your investments could go a long way.
Asset Allocation anyone? Does this term sound familiar? It should - financial planners, mutual fund companies, trust companies and stock brokers have drilled this into our heads for the last decade or so. It's the latest and greatest. (Actually, Harry Markowitz was playing around with this back in the 1950's but, until the advent of powerful PCs, Modern Portfolio Theory was only used by the big institutional investors).
For the most part, asset allocation also works. As long as we keep it in perspective and understand that our most important investment objective is our "well being" and not some bonehead's "optimum portfolio allocation"; we'll be okay. Our money is meant to work for us, not the other way around.
Basically, Asset Allocation divides investments into three major asset classes: Growth, Income, and Cash. Like making spaghetti sauce, combining the ingredients in different ratios is going to give us different results. Ultimately, we will stay with the ratio that suits us best. Don't worry about the neighbors' tastes. They can peel their own garlic. Like any good recipe, though, it does help to have some guidelines.
Here's three common growth allocations:
1. The Aggressive Growth Portfolio - 100% Growth / 0% Income and Cash.
In the short term, these portfolios should come with a warning label. The volatility can upset all but the strongest constitutions. Historically, this is a long-term strategy. If you want to smooth out the ride, time horizons of at least 10 years are often suggested.
Returns over the long term should equate to overall stock market returns. The pattern of return will also reflect the various up and down years of the market.
This should be obvious, but you shouldn't be looking for much income from this allocation because it's not going to be there. Sure, you may be able to go into principal for income needs, but growth allocations generally don't like to be tampered with. If you need income, other allocations will probably suit you better. This portfolio is best for those with a high risk tolerance and a time horizon of some duration.
2. The "Classic" Growth Portfolio - 80% Growth / 20% Income and Cash.
Like the Aggressive Portfolio, this places a high priority on long-term investment growth. It just does it without quite the extreme volatility, which of course is accomplished by adding some bonds and cash to the mix. The time horizon to enjoy the results are also shortened. There may be some give up in overall return, but many people will readily trade return for lessened volatility. Income yield typically can approach 1.5%.
This still isn't for the meek, but does start to define mainstream investing in the United States.
3. The Balanced Growth Portfolio - 60% Growth / 40% Income and Cash.
This portfolio seeks both long term growth and income. Because the optimum time horizon is cut to 7 years or so, it doesn't demand a lifetime commitment prior to enjoying its rewards. Again we continue to trade risk for return, but with an average income return of a little over 2%, we begin to shift the focus off pure growth.
For those following the "prudent person" rule, the 60/40 allocation is a favorite. Often seen in trusts, this model can serve both income and principal beneficiaries.
Although other models are allocated toward income, the above models are the major allocations appearing in most financial readings. As guideposts to putting together your portfolio, you should become comfortable with how each of these models operates in determining both risk and return.
Common Sense Investing
By Chip Dahlke, Living Trust Network
Glenn "Chip" Dahlke has 28 years of experience in investing and is a principal of Dahlke Financial Group. He maintains a private investment clientele and is also a Senior Contributor to The Living Trust Network and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.
Contact him at email@example.com.