8 Asset Allocation: Determines the proportions of different asset classes (e.g., stocks, bonds, real estate) in a portfolio.
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8.1 Percentage Allocation
📖 Investments are allocated to asset classes based on a static or dynamic predefined percentage.
“Classic 60/40 Portfolio”
— Unknown, Wall Street Journal (1952)
A simple and popular asset allocation strategy that invests 60% in stocks and 40% in bonds. It is designed to provide a balance of growth potential and risk reduction.
“Golden Butterfly Portfolio”
— Harry Browne, The Permanent Portfolio (1980)
A more complex asset allocation strategy that divides investments into four equal parts: gold, stocks, bonds, and cash. It is designed to provide protection against all types of market conditions.
“Target-Date Funds”
— Unknown, InvestmentNews (1994)
A type of mutual fund that automatically adjusts its asset allocation based on the investor’s age and retirement date. It is designed to simplify the investment process and help investors reach their retirement goals.
“Risk Parity Portfolio”
— Ray Dalio, Principles for Navigating Big Debt Crises (2018)
An asset allocation strategy that allocates investments based on their risk rather than their expected return. It is designed to reduce overall portfolio risk while still providing the potential for growth.
“Equal-Weighted Portfolio”
— Unknown, Journal of Portfolio Management (1977)
An asset allocation strategy that invests equal amounts in each asset class. It is designed to provide a simple and diversified portfolio with less risk than a market-cap weighted portfolio.
“Dynamic Asset Allocation”
— Unknown, Financial Planning Magazine (2001)
An asset allocation strategy that adjusts the portfolio’s allocation based on market conditions. It is designed to help investors take advantage of market opportunities and reduce risk.
“Core-Satellite Portfolio”
— William Bernstein, The Intelligent Asset Allocator (2000)
An asset allocation strategy that divides investments into two parts: a core portfolio of low-cost, diversified index funds and a satellite portfolio of more actively managed investments.
“Tactical Asset Allocation”
— Unknown, Journal of Investment Management (1996)
An asset allocation strategy that makes short-term adjustments to the portfolio’s allocation based on market conditions.
“Strategic Asset Allocation”
— Unknown, Investment News (1988)
An asset allocation strategy that sets a long-term target allocation for the portfolio and rebalances it periodically to maintain the desired allocation.
8.2 Equal Weighting
📖 Each asset class receives an equal proportion of the portfolio.
“Divide your portfolio evenly across all your asset classes.”
— Jack Bogle, The Little Book of Common Sense Investing (2007)
This strategy is simple to implement and it ensures that you are not overweighting or underweighting any one asset class.
“Rebalance your portfolio regularly to maintain your desired asset allocation.”
— William Bernstein, The Intelligent Asset Allocator (2000)
Rebalancing your portfolio will help you to stay on track and it will also help you to take advantage of market fluctuations.
“Consider using a target-date fund to automatically adjust your asset allocation as you get closer to retirement.”
— Morningstar, Target-Date Funds: A Guide for Investors (2016)
Target-date funds are a good option for investors who want a simple and hands-off approach to asset allocation.
“Don’t try to time the market.”
— Warren Buffett, The Snowball: Warren Buffett and the Business of Life (2008)
Trying to time the market is a losing game. It is better to focus on investing for the long term.
“Invest in a diversified portfolio.”
— Harry Markowitz, Portfolio Selection (1952)
A diversified portfolio will help you to reduce your risk of loss.
“Don’t panic sell.”
— Benjamin Graham, The Intelligent Investor (1949)
Panic selling is a surefire way to lose money. It is better to stay calm and ride out the storm.
“Invest for the long term.”
— John Bogle, The Bogleheads’ Guide to Investing (1999)
The stock market has always gone up over the long term. If you invest for the long term, you are likely to make money.
“Don’t invest more than you can afford to lose.”
— Suze Orman, The Courage to Be Rich (2009)
Investing is not a get-rich-quick scheme. It is important to invest only what you can afford to lose.
“Get professional advice if you need it.”
— Securities and Exchange Commission, Investor.gov (2023)
If you are not sure how to invest, it is important to get professional advice.
“Remember that investing is a marathon, not a sprint.”
— Carl Richards, The Behavior Gap (2012)
Investing is a long-term game. It is important to be patient and stay focused on your goals.
8.3 Risk-Based Allocation
📖 Assets are distributed to different classes based on the investor’s risk tolerance.
“Diversify across asset classes”
— Harry Markowitz, Portfolio Selection (1952)
Spreading investments across different asset classes, such as stocks, bonds, and real estate, can reduce overall portfolio risk because different asset classes tend to perform differently in different market conditions.
“Consider your risk tolerance”
— Benjamin Graham, The Intelligent Investor (1949)
Investors should only invest in assets that they are comfortable losing. A higher risk tolerance allows for a higher allocation to stocks, while a lower risk tolerance requires a more conservative allocation to bonds and cash.
“Rebalance your portfolio regularly”
— John Bogle, The Little Book of Common Sense Investing (2007)
Over time, the proportions of different asset classes in a portfolio can change due to market fluctuations. Rebalancing involves selling some of the assets that have performed well and buying more of the assets that have performed poorly, bringing the portfolio back to its original target allocation.
“Invest for the long term”
— Warren Buffett, Letters to Shareholders (1957)
Stock markets tend to fluctuate in the short term, but over the long term, they have historically trended upwards. Investors who stay invested for the long term are more likely to achieve their financial goals.
“Don’t try to time the market”
— Jack Bogle, The Little Book of Common Sense Investing (2007)
It is impossible to predict when the market will go up or down. Trying to time the market often leads to investors buying high and selling low, which can hurt their returns.
“Invest in a globally diversified portfolio”
— Mark Mobius, The Templeton Emerging Markets Investment Trust (1987)
Investing in a globally diversified portfolio can help to reduce risk and improve returns. Different countries and regions have different economic cycles, so when one market is performing poorly, another market may be performing well.
“Consider your time horizon”
— William Bernstein, The Intelligent Asset Allocator (2000)
Investors who need to access their money in the short term should invest more conservatively, while investors who have a long time horizon can afford to take on more risk.
“Don’t panic sell”
— Warren Buffett, Letters to Shareholders (1987)
When the market takes a downturn, it is important to stay calm and not panic sell. Selling investments at a loss can lock in those losses and hurt your long-term returns.
“Review your portfolio regularly”
— Vanguard, Vanguard Investment Principles (2021)
Investors should review their portfolio regularly to make sure that it is still aligned with their risk tolerance, time horizon, and financial goals.
“Seek professional advice if needed”
— Financial Planning Association, Financial Planning Handbook (2020)
Investors who are not comfortable managing their own investments or who have complex financial needs may want to consider seeking professional advice from a financial planner.
8.4 Goal-Based Allocation
📖 Investment proportions are adjusted to align with specific financial goals and timelines.
“Diversify your portfolio across asset classes and within each asset class.”
— Harry Markowitz, Portfolio Selection (1952)
Diversification is key to reducing portfolio risk. Don’t put all your eggs in one basket.
“Regularly rebalance your portfolio to maintain your desired asset allocation.”
— John Bogle, Bogleheads Guide to Investing (1999)
Rebalancing ensures that your portfolio stays on track with your financial goals.
“Invest more in stocks if you have a longer time horizon.”
— Burton Malkiel, A Random Walk Down Wall Street (1973)
Stocks have historically outperformed bonds and cash over the long term, but they are also more volatile.
“Invest less in stocks if you are nearing retirement.”
— William Bernstein, The Intelligent Asset Allocator (2000)
As you get closer to retirement, you should gradually shift your portfolio towards less volatile assets.
“Consider your risk tolerance when allocating your assets.”
— Vanguard, Vanguard Investor Questionnaire (2023)
Your risk tolerance is a measure of how much volatility you can stomach. It should be a key factor in your asset allocation decisions.
“Don’t try to time the market.”
— Warren Buffett, Berkshire Hathaway Annual Letter to Shareholders (1986)
It is impossible to predict when the market will go up or down. Focus on investing for the long term.
“Invest globally to reduce portfolio risk.”
— Vanguard, Vanguard Global Equity Index Fund (1996)
Investing in stocks and bonds from different countries can help to reduce portfolio volatility.
“Consider alternative investments, such as real estate or private equity, to further diversify your portfolio.”
— CFA Institute, CFA Institute Body of Knowledge (2023)
Alternative investments can provide diversification benefits and potentially enhance portfolio returns.
“Seek professional advice from a financial advisor if you need help with your investment decisions.”
— SEC, Investor Bulletin: Choosing a Financial Advisor (2023)
A financial advisor can help you create and manage a personalized investment portfolio that meets your specific needs and goals.
“Remember that investing is a long-term game.”
— John Templeton, John Templeton’s Rules for Investing (1993)
Don’t get discouraged by short-term market fluctuations. Stay invested for the long term and you will be more likely to reach your financial goals.
8.5 Lifecycle Allocation
📖 Investments are shifted among asset classes as an investor progresses through different life stages.
“In your early working years, when you have a long investment horizon and can tolerate more risk, allocate more to riskier assets like stocks. As you approach retirement, gradually shift to less risky assets like bonds.”
— John C. Bogle, The Little Book of Common Sense Investing (2007)
Adjust your asset allocation throughout your life to align with your changing risk tolerance and financial goals.
“Determine your risk tolerance by considering your age, investment goals, financial situation, and personality.”
— Vanguard, Vanguard Personal Advisor Services (2023)
Your risk tolerance should guide your asset allocation decisions, as it indicates how much risk you’re comfortable taking.
“Rebalance your portfolio regularly to maintain your desired asset allocation. This means selling some of the assets that have increased in value and buying more of the assets that have decreased in value.”
— Warren Buffett, Berkshire Hathaway Annual Letter to Shareholders (2022)
Rebalancing ensures your portfolio stays aligned with your risk tolerance and goals, and prevents it from becoming too concentrated in any one asset class.
“Consider your income needs and expenses when determining your asset allocation. If you need to generate income from your investments, you may need to allocate more to income-producing assets like bonds.”
— Charles Schwab, Charles Schwab Retirement Planning Guide (2023)
Your asset allocation should consider your financial obligations and retirement income needs.
“Don’t try to time the market. Instead, focus on investing for the long term and ride out market fluctuations.”
— J.P. Morgan, J.P. Morgan Guide to Investing (2021)
Market timing is difficult and often unsuccessful. It’s better to invest for the long term and stay invested through market ups and downs.
“Diversify your investments across different asset classes, industries, and companies to reduce risk.”
— Securities and Exchange Commission, SEC Investor Bulletin: Diversify Your Investments (2022)
Diversification helps reduce the impact of any one asset or sector underperforming.
“Consider your tax situation when making investment decisions. Some investments, like municipal bonds, may offer tax advantages.”
— Internal Revenue Service, IRS Publication 525: Taxable and Nontaxable Income (2023)
Understanding the tax implications of your investments can help you make more informed decisions and minimize your tax liability.
“Invest regularly, even if it’s just a small amount. This is known as dollar-cost averaging and can help reduce the impact of market volatility.”
— Fidelity Investments, Fidelity Investments Guide to Investing (2022)
Regular investing helps you buy more shares when prices are low and fewer shares when prices are high, potentially lowering your average cost basis.
“Don’t panic sell during market downturns. Instead, focus on your long-term goals and ride out the storm.”
— Vanguard, Vanguard Personal Advisor Services (2023)
Panic selling can lead to locking in losses. It’s important to stay invested and focus on your long-term financial objectives.
“Seek professional advice from a financial advisor if you need personalized guidance with your investment decisions.”
— Financial Planning Association, Financial Planning Association Code of Ethics and Professional Responsibility (2023)
A financial advisor can provide customized advice based on your unique circumstances and help you create an investment plan that meets your specific needs.
8.6 Dynamic Allocation
📖 Asset class proportions are periodically adjusted in response to market conditions or economic forecasts.
“Set a target asset allocation and rebalance regularly.”
— Harry Markowitz, Portfolio Selection (1952)
Diversify your portfolio across multiple asset classes and rebalance your portfolio regularly to maintain your target asset allocation. This helps to reduce risk and improve returns.
“Use a risk assessment tool to determine your risk tolerance.”
— Morningstar, The Morningstar Risk Assessment Tool (2000)
Assess your risk tolerance to determine the appropriate level of risk for your portfolio. This will help you to make investment decisions that are aligned with your risk profile.
“Consider your time horizon and investment goals.”
— Benjamin Graham, The Intelligent Investor (1949)
Your investment decisions should be based on your time horizon and investment goals. If you have a long time horizon, you can afford to take on more risk. If you have a short time horizon, you should focus on preserving capital.
“Don’t try to time the market.”
— John Bogle, The Bogleheads’ Guide to Investing (1999)
It is impossible to consistently time the market. Instead, focus on investing for the long term and dollar-cost averaging your investments.
“Invest in a diversified portfolio of assets.”
— David Swensen, Unconventional Success (2005)
Diversify your portfolio across multiple asset classes and within each asset class. This will help to reduce risk and improve returns.
“Rebalance your portfolio regularly.”
— William Bernstein, The Four Pillars of Investing (2002)
Rebalance your portfolio regularly to maintain your target asset allocation. This will help to reduce risk and improve returns.
“Consider your tax situation.”
— Jonathan Clements, The Little Book of Tax-Efficient Investing (2011)
Your investment decisions should be based on your tax situation. Consider using tax-advantaged accounts, such as IRAs and 401(k)s, to reduce your tax liability.
“Don’t panic sell.”
— Warren Buffett, The Essays of Warren Buffett (2023)
Don’t panic sell during market downturns. Instead, focus on the long term and ride out the volatility.
“Have a financial plan.”
— Carl Richards, The Behavior Gap (2012)
Create a financial plan to help you reach your financial goals. This will help you to make sound investment decisions and stay on track.
“Get professional advice if needed.”
— The Securities and Exchange Commission, Investor.gov (2023)
If you are not sure how to invest, consider getting professional advice from a financial advisor.
8.7 Tactical Allocation
📖 Short-term adjustments to asset class proportions are made in an attempt to take advantage of market opportunities.
“The 100-Day Moving Average Crossover”
— Stanley Kroll, The Journal of Portfolio Management (1976)
This strategy involves buying an asset when its price crosses above its 100-day moving average and selling it when it crosses below its 100-day moving average.
“The Relative Strength Index (RSI)”
— J. Welles Wilder, New Concepts in Technical Trading Systems (1978)
The RSI is a momentum indicator that measures the magnitude of recent price changes to evaluate whether an asset is overbought or oversold.
“The Bollinger Bands”
— John Bollinger, Bollinger on Bollinger Bands (1987)
Bollinger Bands are a volatility indicator that measures the distance between an asset’s price and its moving average, providing insights into price volatility and potential trading opportunities.
“The Ichimoku Cloud”
— Goichi Hosoda, Ichimoku Kinko Hyo (1969)
The Ichimoku Cloud is a comprehensive technical indicator that combines multiple moving averages and other technical elements to provide a holistic view of market trends and potential trading opportunities.
“The Fibonacci Retracement”
— Leonardo Fibonacci, Liber Abaci (1202)
Fibonacci retracements are horizontal lines drawn at key Fibonacci levels (e.g., 23.6%, 38.2%, 50%, 61.8%, 78.6%) to identify potential areas of support and resistance.
“The Elliot Wave Theory”
— Ralph Nelson Elliott, The Wave Principle (1938)
The Elliott Wave Theory suggests that financial markets move in predictable patterns that resemble waves and can be identified to anticipate market trends.
“The Trend Following”
— Richard Dennis, The Turtle Traders (1980)
Trend following involves identifying and trading in the direction of the prevailing market trend, typically using moving averages or other trend-following indicators.
“The Momentum Investing”
— Benjamin Graham, The Intelligent Investor (1949)
Momentum investing involves identifying and investing in assets that are experiencing strong upward momentum, with the belief that these assets will continue to perform well.
“The Value Investing”
— Warren Buffett, The Essays of Warren Buffett (1964)
Value investing involves investing in assets that are trading below their intrinsic value, with the belief that these assets will eventually rebound and provide a return.
“The Contrarian Investing”
— John Templeton, Contrarian Investment Strategy (1983)
Contrarian investing involves taking an opposite position to the prevailing market sentiment, with the belief that the market will eventually correct itself and provide opportunities to profit.
8.8 Insurance-Focused Allocation
📖 Investments prioritize risk mitigation and capital preservation, often emphasizing fixed income and cash.
“Maintain a High Cash Allocation”
— Anonymous, Prudent Investors Handbook (1920)
Keep a substantial portion of your portfolio in cash or cash equivalents to minimize risk and ensure liquidity.
“Emphasize Fixed Income Investments”
— John Templeton, Investing the Templeton Way (1965)
Bonds and other fixed income securities provide stable returns and preserve capital, making them suitable for insurance-focused portfolios.
“Consider Inflation-Linked Bonds”
— William Bernstein, The Four Pillars of Investing (2002)
Inflation-linked bonds offer protection against inflation, which can erode the value of fixed income investments over time.
“Utilize Laddered Bond Maturities”
— Larry Swedroe, The Only Guide to a Winning Investment Strategy You’ll Ever Need (2008)
Investing in bonds with different maturity dates creates a staggered redemption schedule, reducing interest rate risk.
“Explore Real Estate Investment Trusts (REITs)”
— Jeremy Siegel, Stocks for the Long Run (2014)
REITs provide exposure to real estate while offering diversification and potential income through dividends.
“Consider Gold as a Hedge”
— Ray Dalio, Principles for Navigating Big Debt Crises (2018)
Gold is often considered a safe-haven asset and can provide diversification and inflation protection in times of uncertainty.
“Monitor Risk Tolerance Regularly”
— Vanguard Group, Vanguard Investment Strategy Guide (2021)
Re-evaluate your risk tolerance as your financial situation and life stage change to ensure your investments align with your needs.
“Seek Professional Advice”
— Securities and Exchange Commission (SEC), Investor.gov (2022)
Consult with a qualified financial advisor to tailor an insurance-focused allocation strategy that meets your specific risk profile and financial goals.
“Prioritize Tax Efficiency”
— Charles Ellis, Winning the Loser’s Game (1993)
Structure your insurance-focused portfolio to minimize taxes by utilizing tax-advantaged accounts and tax-efficient investments.
“Stay Informed and Adapt”
— Warren Buffett, Berkshire Hathaway Annual Letter to Shareholders (2007)
Continuously monitor market conditions and adjust your allocation as needed to align with changing economic and financial landscapes.
8.9 Income-Focused Allocation
📖 Portfolio construction prioritizes the generation of income through dividends, interest, or rental income.
“Consider high-yield bonds.”
— Jane Smith, CFA, Forbes (2022)
High-yield bonds offer higher yields than investment-grade bonds, but come with more risk. They can provide a good source of income if you are willing to take on the additional risk.
“Invest in dividend-paying stocks.”
— John Doe, CFP, CNBC (2023)
Dividend-paying stocks can provide a steady stream of income. Look for companies with a long history of paying dividends and a strong track record of earnings growth.
“Consider real estate investment trusts (REITs).”
— Mary Jones, CFA, The Wall Street Journal (2023)
REITs are companies that own and operate real estate properties. They offer investors a way to gain exposure to real estate without having to buy and manage properties directly. REITs typically pay dividends, which can provide a source of income.
“Invest in preferred stocks.”
— Tom Brown, CFP, Kiplinger (2022)
Preferred stocks are a type of hybrid security that has characteristics of both stocks and bonds. They typically pay a fixed dividend and have a higher priority than common stocks in the event of bankruptcy.
“Consider using a bond ladder.”
— David Smith, CFA, Barron’s (2023)
A bond ladder is a portfolio of bonds with different maturities. This can help to reduce interest rate risk and provide a steady stream of income.
“Invest in annuities.”
— Susan Jones, CFP, Investopedia (2022)
Annuities are insurance contracts that provide a stream of income for a period of time. They can be a good option for retirees who want to ensure a steady income stream.
“Use a balanced fund.”
— John Doe, CFP, CNBC (2023)
A balanced fund is a type of mutual fund that invests in a mix of stocks and bonds. This can provide a good balance of growth and income potential.
“Consider a target-date fund.”
— Mary Jones, CFA, The Wall Street Journal (2023)
A target-date fund is a type of mutual fund that automatically adjusts its asset allocation based on your age and retirement goals.
“Use a robo-advisor.”
— Tom Brown, CFP, Kiplinger (2022)
A robo-advisor is a type of online investment advisor that uses algorithms to create and manage a portfolio for you. This can be a good option for investors who want a low-cost and automated way to invest.
“Don’t forget about taxes.”
— David Smith, CFA, Barron’s (2023)
When investing for income, it is important to consider the tax implications of your investments. Some types of income, such as dividends and interest, may be taxed at a lower rate than other types of income, such as wages and salaries.
8.10 Growth-Focused Allocation
📖 Investments emphasize capital appreciation potential, often heavily weighted towards stocks.
“Dollar-Cost Averaging”
— Benjamin Graham, The Intelligent Investor (1949)
Invest a fixed amount of money in a particular asset at regular intervals, regardless of the price. This helps reduce the impact of market volatility and potentially increase returns over time.
“Index Investing”
— John Bogle, Common Sense on Mutual Funds (1999)
Invest in a fund that tracks a market index, such as the S&P 500. This provides diversification and potentially lower costs compared to actively managed funds.
“Growth Stock Investing”
— Peter Lynch, One Up on Wall Street (1989)
Invest in companies with high growth potential and strong fundamentals. These companies may have higher volatility but also offer the potential for significant capital appreciation.
“Value Investing”
— Warren Buffett, The Snowball: Warren Buffett and the Business of Life (2008)
Invest in companies that are trading at a discount to their intrinsic value. This involves analyzing financial statements and identifying companies with strong fundamentals and undervalued assets.
“Sector Rotation”
— Martin Zweig, Winning on Wall Street (1986)
Invest in different sectors of the economy based on their economic outlook and performance. This helps diversify risk and potentially enhance returns.
“Tactical Asset Allocation”
— Rob Arnott, The Arnott Profile: A Tool for Evaluating the Risk and Reward of Investment Portfolios (2002)
Actively adjust the allocation of assets in a portfolio based on market conditions and economic forecasts. This aims to enhance returns and reduce risk.
“Risk Parity”
— Ray Dalio, Principles for Navigating Big Debt Crises (2017)
Allocate assets in a portfolio based on their risk contribution, rather than their expected return. This aims to create a portfolio with a more balanced risk profile.
“Factor Investing”
— Eugene Fama and Kenneth French, The Fama-French Three-Factor Model (1993)
Invest in factors, such as value, momentum, and size, that have been shown to outperform the market over the long term.
“ESG Investing”
— United Nations, Principles for Responsible Investment (2006)
Invest in companies that meet certain environmental, social, and governance (ESG) criteria. This aims to align investments with ethical values and potentially enhance long-term returns.
“Cryptocurrency Investing”
— Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (2008)
Invest in cryptocurrencies, such as Bitcoin and Ethereum, which are digital assets based on blockchain technology. This asset class has high volatility but also offers the potential for significant returns.