How Does My Asset Allocation Compare to Everyone Else?

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With cars, we have categories like sedan , minivan , and SUV. Just as with cars, not everything within each category is exactly the same.

Part 2: What are the major asset classes and how do they work?

But they share similar characteristics like expected risk and return. For the most part, cash refers to money you have in checking accounts and savings accounts.

It can also refer to money market funds within an investment account. Cash has the lowest expected return but also the highest amount of certainty. Bonds are technically loans you make to companies, governments, or other organizations. For example, you can buy into a mutual fund that owns the entire US bond market , one that invests only in bonds issued by the US government , and countless other varieties. Bonds have a medium expected return with a medium amount of risk.

Bonds are particularly good as the conservative part of your asset allocation, balancing out the higher-risk, higher-return nature of stocks. Stocks represent ownership in a company. As an owner, you have both an unlimited potential for gain and the potential to lose it all. The ups and downs of the stock market can be very high from year to year, and even from day to day. You can smooth out the ride by diversiyfing your stock portfolio over many different companies , reducing the risk that any one company could sink you.

Create an Asset Allocation

For most people, all you need to build a strong investment strategy are the three above. Imagine someone asked you to decide right now how you want to divide your time between family, friends, work, and play for the rest of your life. What would your answer be? What do you think is the optimal balance given your personal goals, values, and situation? There are so many variables, so many unknowns, and even your best guess most likely feels like a shot in the dark.

For most people, trying to figure out the right asset allocation feels exactly the same way. Asset allocation is part science and part personal preference, and you can only truly get a handle on the personal preference part through experience. Now, keep in mind that the answer you get here is NOT a specific recommendation. There are many factors that go into this decision, including your specific goals, values, and circumstances, and no questionnaire can factor all of that in.

What are some situations in which you should increase your allocation to stocks, exposing yourself to more risk in search of higher returns? Still, here are a few situations in which you could at least consider investing more aggressively. Sticking with it was hard, but you made it through.

Another strategy to consider is tactical asset allocation or TAA. TAA involves active portfolio management by rebalancing the percentages of assets based on current economic conditions. You may want to temporarily rebalance your portfolio to focus on stocks. Buy low, sell high. When everyone is scared, there are deals to be had. So you must first decide on whether you want to DIY your own asset allocation, hire a professional advisor, or use a robo advisor service to do it for you at an affordable price.

Doing It Yourself — Obviously, the benefits to handling your own asset allocation allows you to save some money on paying professional fees and expenses. The downside is that you might not be updated enough on the goings-on of the stock market to choose the best diversification strategy for your personal needs. Using a Robo Advisor — As a sort of middle-of-the-road option, a robo advisor, such as Betterment will choose a preset allocation strategy for you, based on your risk profile.

This allows you to feel confident in your decision without paying a ton of fees.

Should You Focus on Asset Allocation or Stock Picking? -

Hiring a Financial Advisor — A professional can help pin point the best allocation for your current situation and investment goals. However, they will be a bit pricier than if you tried tackling it yourself.

These funds allow easy diversification without the possibly complicated process of stock picking. For most individuals ETFs are usually the better choice. As a matter of fact, the opposite is true for most people. Most of the rest of the country is poor! You can stay in the U.

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Your buying power has remained the same relative to your peers. Now, would you leave the U.

Percentage of the World’s GDP from the U.S.

Leave your extended family? Possibly learn another language if all the English-speaking countries hit the fan? Most Americans want to die Americans. That could change, but things would have to get pretty dire. Well, in this debt- and consumer-oriented country most everyone is broke, so that just aligns you with your peers. However, in your own mind, you know that you went from believing that you had very carefully managed your finances, to having much, much less. Life goes on in the U. So, the risk is really that you could be left with nothing relative to your peers.

U.S. Versus International Stock Allocation

That only happens if you buck the traditional allocation advice. The vast majority of people retire in their own countries, which means that they need their investments to maintain value in their own countries. Sorry for such a delayed response to the article, but I just started reading your site — I really like it so far!

I like your analysis and agree with most of your points, but there is one thing I think you may have overlooked: One example, off the top of my head, would be Hewlett-Packard. It does seem as though stocks typically react to country of origin news and economic climate — even if their overseas revenue is a bigger component though. First, transaction costs are higher generally for international funds. This is because of the higher cost of doing business overseas and making funds available in the U. Third, investing in U. Currently, economic policymakers in the U.

While that suggests foreign investments will fare better in the short run, if policy changes, then fortunes will reverse. Further, unforeseen international problems see Russian crisis in late s can asymmetrically impact international holdings. While I disagree with Mr.