Asset Allocation

Before we discuss investment vehicles, it is paramount to have a proper foundation. Asset allocation is a fancy way to say "don't have all your eggs in one basket". In other words, if something goes bad with one or two investments, you still have others that perform, not only to prevent you from losing everything, but to continually grow your nest egg.

Everyone will have a slightly different idea of what asset allocation is, because it is based on a person's risk tolerance and age. Generally, when you are older, you become more conservative because you have less time from when you need to draw on it and more wealth to lose. We discussed risk versus reward in a previous post. The best way to reduce risk is to understand the situation and calculate the possibility of loss. The lower the possibility of loss balanced with the opportunity for gain will determine what you are willing to risk.

To give you an idea what is a commonly accepted portfolio for medium risk and middle age, around 70% should be dedicated toward growth (stocks, equities), 20% toward income (bonds, real estate), and 10% toward aggressive growth (pre-ipo stocks, start-ups, penny stocks). A significant gain in the last category can double your return, but a lot of these don't return anything unless you really understand the risk and perform outstanding due diligence. And sometimes, you might get lucky.

It's also very important to understand cycles. Economies will vary significantly in cycles. Typically, stocks will do well on an overall basis for about 20 years, then will take a significant tumble. Commodities, such as gold and silver, will then do well for about 10 years, and then the cycle will repeat. Pay very close attention to these and find out what the markets are doing. An investment on the top of the cycle is the wrong time to buy. You want to buy low and sell high, or the reverse to maximize returns. This is tricky to identify exact times, so don't try to be perfect. Just be aware of the trend.

If you are wise, your wisdom will reward you;
if you are a mocker, you alone will suffer. Proverbs 9:12

There will be more on investment vehicles this week. Stay tuned ...