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Asset allocation Which formula are you using to diversify your assets? There is no single formula that can be used by investors. Since asset allocation plays a major part in the performance of the portfolio, you should review your holdings at least quarterly. Usually, the basic allocation is to own stocks, bonds, and cash. It is advisable that a portfolio consists of stocks from different sectors. The basic formula does not include other assets such as a house, or a family owned business, nor does it consider liabilities. Furthermore, the most important factor is your age and your tolerance for risk. An investor should make gradual adjustments in the mix of assets to correspond with the changing needs for capital growth, steady income, or a combination of the two, depending on the age and the time left to retirement. Young investors in their mid-twenties, who just started building their portfolio, can assume greater risk with their capital. They should set aside some cash for emergencies and invest the rest in growth stocks. An aggressive investor, who is in mid-twenties, could invest 90% in stocks and keep 10% in cash (which could be in a checking account).  Such an investor could acquire stocks of: Dell Computer Corporation, Microsoft Corporation, Intel Corporation, Cisco Systems, Qwest Communications International Inc., IBM Corporation, EMC Corporation, and hold these at least ten years. This aggressive investor, who is just starting out, could acquire $3,000 worth of each stock and gradually build the portfolio. Although all of these stocks are in the technology sector, the growth of revenues and earnings could continue to outperform every other sector during the next decade. Investors who are nearing the age of forty, and especially these who are married and have teenage children who will enter college in a few years, should readjust their asset allocation and set aside larger percentage of their portfolio into cash and short term Treasury bonds, or Treasury bills. These investors should still keep at least 50% of assets invested in large-cap growth stocks, in different sectors, which historically over time have provided the highest return. A moderate investor who is nearing the age of forty could keep 60% of assets in stocks, 25% of assets in Treasury bonds and 15% in cash. Such a portfolio should consist mostly of high quality, large-cap growth stocks.  Once an individual retires, as a rule of thumb 50% of the portfolio should be invested in Treasury bonds, 30% in money-market funds, or Certificates of Deposit, and 20% should still be invested in large-cap growth stocks. Investors should be aware that there are no basic rules. Each situation is different and each individual can accept a different degree of risk depending on the person's age, investing experience, and the outlook on the economy. There are some individuals who are overly cautious, and they have almost all of their assets invested in Certificates of Deposit because they fear the loss of their capital. Although preservation of capital is very important, they may not realize that they incur greater risk by not having their investments keep up with the inflation. After fifteen years, annual inflation rate of 5% will diminish the value of $1,000 to less than $500. On the other hand, some investors who have accumulated sizeable portfolio in the $2 to $3 million range, could have as much as 80% of their assets invested in large-cap stocks. Remember that there is no simplistic formula. Each investor should analyze the possible future return on different types of investments and diversify accordingly. |