12. Create an asset allocation based on you risk tolerance. This is easier than you think.
Simply put, an asset allocation is just how you divide up your savings and investments. Matching your more stable assets (Bonds/Cash/Real estate) to your age is the basic rule of thumb. i.e. if you are 40 you should hold 40% in stable assets and 60% in stocks. If you feel that you would need or like a more aggressive portfolio you could subtract 10% from your age. Or if you think the stock market is too unstable you can add 10% to your age. Make this as simple or as complex as you like. Here are some examples of basic asset allocations. In part B and C I will break down different types funds so you can see more detailed portfolio examples.
Age 20, single, renter
90% Stocks
10% Cash
Your young and can easily recover from set backs. Go with a broad based stock market index fund and just use cash for the safe 10%. A simple and aggressive portfolio is very appropriate.
Age 30, Just married, no children, new home owner
70% Stocks
30% Bonds/Cash
Just starting out in life land maybe a family. An average portfolio is probably the ticket.
Age 40, Married, two children, renter
60% Stocks
40% Bonds/Cash
Average
Age 50, Married, 2 kids in college, 10 years left on mortgage, Health issues
40% Stocks
60% Bonds/Cash/Home equity
With all of your obligations (Tuition, Mortgage, Health care) you should be more conservative with your portfolio.
Age 60, Single, No children, House paid off, Healthy, Not much saved
50% Stocks
50% Bonds/Cash
You don't have a lot of obligations but you don't have a lot saved. An aggressive portfolio may be quite helpful in this situation just remember to always reference your age.
This is completely a judgment call on your part. A financial pros and cons list. Account for all the variables that only you can know and get feel for your risk tolerance. If you just don't know what to do then go with your age.
Loving the blog, brother.
ReplyDeleteI have a question not directly related to retirement: do you have any advice on saving a decent amount towards a future expense? i.e. preschool in a year or two for your toddler.
Go to your companies payroll dept or person and ask to redo or update your direct deposit form. Have a predefined amount deposited in a "high" interest savings account biweekly.
ReplyDeleteIf you have a specific amount as a goal lets say $2000 in two years. Divide 2000 by the number of pay periods between now and then, in this case it's 52. That gives you $38.46 or $39 deducted from each paycheck. You can redirect multiple amounts to multiple accounts. You won't even notice it's gone. This is how I fund my wife's Roth IRA.
If you had a five years or more before you needed the money I would recommend an online brokerage account. That way you could invest the money a little more long term.
For your current time window I would use an online savings account or start up a CD ladder (watch your time horizon on CDs). You should be able to find 2% out there. Check bankrate.com for the best interest rate.