Personal Financial Planning Series May 2011

Investing for Your Life StageAsset Allocation

Personal Financial Planning Series May 2011FIU Employee Financial Literacy Program

The Life-Stage Approach

The Life-Stage Approach the ability to tolerate risk lessens as retirement approachesHow do you determine your risk tolerance?Insurance deductibleHow much would you invest in an underwater salvage operation?100 54 (your age) = 46 (the percentage of your portfolio that should be in equity)??

Places to gowww.investopedia.comwww.financialengines.comwww.vanguard.com

Asset AllocationModern Portfolio Theory (Markowitz, 1952)The Brinson Studies (1986)Forces us to buy low and sell high!

For example$100,000 (20% large cap, 20% international, 20% small cap, 20% fixed income, 20% cash)$20,000 in the large cap bucket$20,000 in the international bucket$20,000 in the small cap bucket$20,000 in the fixed income bucket$20,000 in the cash bucket

The rebalancing!Our objectives have not changed, so we are still invested 20% each in 5 sectors.Six months later our portfolio looks like this:$27,000 in the large cap bucket$22,000 in the international bucket$18,000 in the small cap bucket$23,000 in the fixed income bucket$20,500 in the cash bucket

Our portfolio has grown to $110,500 or 10.5% in six months

Your gut tells you to leave your money in the large cap fund, but asset allocation forces you to rebalance, so that each sector once again has 20%, which now is $22,100.Remove $4,900 from the large cap bucketAdd $100 to the international bucketAdd $4,100 t0 the small cap bucketRemove $900 from the fixed income bucketAdd $1,600 to the cash bucket