The perfect asset allocation

Which assets should you invest in?

Stocks, bonds, commodities there is an endless list if choices for assets you can choose to invest in. How do you know what is the best choice for you?

The truth is it depends on your situation and age.

There are also an infinite number of asset allocation choices, because there are so many different assets you can invest in. I am only going to choose some of the most popular that people are using.

Full disclosure: I now primarily invested in index funds. My faves:

  • VTI – Vanguard Total Market
  • VGT – Vanguard Information Technology

Now I am most likely more aggressive than the average investor. I have a high threshold for volatility and risk. That translates to me pretty much having all of my investments in equities.

Types of assets you can invest in:

  • Real Estate
  • Stocks
  • Bonds
  • Commodities: Gold, Oil, Coffee, Soy beans etc.
  • Physical products aka stuff

Each class of asset can be broken down into many individual parts.

One of the easiest investment vehicles out there is a target retirement fund from Vanguard. The idea is that you pick a date in the future you want to retire say 2055 and as you put money in over the years the account will slowly allocate more of assets toward bonds away from equities as you get closer toward the retirement age.

Stocks can be volatile. It is important to diversify. An index fund will provide diversification and a solid return over time.

Bonds are stable. They provide a guaranteed return, but their return is less than you can get from the stock market. The prices of stocks, bonds and commodities move independent of one another. So stocks can be increasing while bonds can be decreasing. When the interest rate is lower stocks usually increase while the price of bonds usually decreases.

The price of a commodity like oil fluctuates heavily on OPEC supply and consumer demand.

A simple asset allocation that is somewhat aggressive looks like:
– 25% bonds
– 75% equities

Less aggressive:
– 40% bonds
-60% equities

Safe:
75%bonds
25%equities

You can use a mix of assets to diversify, get returns and protect against downside:
30% Equities – US and International
50% Bonds – Long and Intermediate term
10% Gold
10% Overall Commodities Market

In this asset allocation, equities will provide a rise in value. Bonds will provide steady cash flow. Gold and commodities will be a hedge against a falling equities market. This asset allocation will give you some downside protection while also allowing for growth. You can adjust the percentages up and down to make this allocation more stable or more profitable.

Your first step should be to determine how much risk you are willing to take. Once you decide that then you will to put together a plan that works best for you. It becomes really tempting to continuing messing and tweaking your strategy once you have set it up. DONT. Trust the process and stick with it over time. I use the M1 Finance app to set my percentages and then it does the rest of the work for you.

Asset allocation is designed to provide you with security through diversification. Be smart. Find the perfect fit and let me know how your is organized.

Published by Collin Harness

Obsessed with creating value and helping people achieve financial independence.

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