Early Retirement Blog

Asset allocation is one of the most important, misunderstood, and easiest parts of retirement planning. This three-part article will describe how, in less than 30 minutes and $30 per year, you can properly allocate your assets, and have your investments out-perform 90% of mutual funds.

First, before you learn how to easily and cheaply allocate your assets,   Easy Asset Allocation Part I explains what is asset allocation, how it works, and why it is important.

What is Asset Allocation?

Asset Allocation is 1) How everything you own (assets) is divided up (allocation).   2) The percentage of each asset class (stocks, bonds, cash, real estate) you own in relation to all your assets (net worth).

For instance, if your net worth is $100,000 and you have $4,000 in a checking account, $20,000 in bonds, $25,000 in stocks, $40,000 in real estate, and $11,000 in cars, couches and collectibles, your asset allocation would be:

Cash – 4%
Bonds- 20%
Stocks – 25%
Real Estate – 40%
Other – 11%

How Asset Allocation works

The goal of asset allocation is to have your assets allocated (divided up), in a mix of asset classes (diversification) that maximizes the return of your assets, while minimizing the risk to your net worth as a whole.

Each asset class (stocks, bonds, cash, real estate) have different historical rates of return, different degrees of risk, and behave differently in different economic circumstances.

For example stocks (S&P 500), which have a higher degree of investment risk, have a historical rate of return of 12%.   While bonds (U.S. Treasuries), which are a safer investment, have a historical return of 6%.  They also have an inverse relationship, meaning, when bonds go down stocks go up, and when bonds go up stocks go down.

If your assets are divided equally between stocks and bonds, when one of them is losing value, the other one is gaining value, and they balance each other out.   So, no matter which direction the economy is going, one of your assets will be doing well.   Real estate and cash, it should be mentioned, (adjusted for inflation) have a historical return of 0%.

Why Asset Allocation is Important

Failure to properly allocate your assets can lead to; not saving enough for retirement, losing your savings before retirement, not growing your savings enough to keep up with your spending in retirement, losing your savings during retirement.   Failure to properly allocate your assets, can force you to work longer than necessary, or force you to go back to work after you have retired.

Fortunately, properly allocating your assets is easy, cheap and quick.   Easy Asset Allocation Part II describes how to properly allocate your assets in less than 30 minutes for less than $30.   And, how you can beat 90% of all mutual funds and money managers, while giving yourself 90% odds that you will not run out of money during retirement.

Next: Wall Street Asset Allocation – Dangerous Rip-Off

Also Read:
Asset Allocation and your House
Rent or Own a Home in Retirement
Free Retirement Calculators