The very first step in DIY investing is to come up with an asset allocation plan. Today this is pretty straight forward because suggested models are easily accessible online with all of the relevant parameters.
Today we'll look at the American Association of Individual Investors (AAII) models and tomorrow we'll consider Schwab's. These are just two of the many available.
Keep it Simple
The first thing to know is that there is considerable value to keeping the whole asset allocation business simple. It isn't as scientific as is sometimes presented by financial advisors.
The objective is to arrive at a targeted percentage to invest in various asset classes.
The simplicity of the process is illustrated by the three models proposed by AAII:
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As you can see, the AAII models suggest 3 categories: aggressive, moderate, or conservative. The aggressive model has 90% stocks, 10% bonds. The conservative model is split 50/50. Note that there are 7 asset classes.
Here are the historical returns of the 3 models:
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As shown, the longer term performance of the Aggressive model exceeds that of the other two. This illustrates the reward for taking on more risk.
Which model should you choose? To help, AAII provides "Broad Allocation Scenarios." This tells you the relevant points to consider:
Notice that age, investment horizon, and volatility are listed. Notice that the worst year return is given. These are all important in choosing a model. Still, overall, I'm sure you'll agree that the process is fairly straight forward.
A couple of additional points should be kept in mind. First, the model isn't set in concrete. If the market gets you nervous and you are having trouble sleeping at night, by all means get more conservative. What you don't want to do is continually switch back and forth and, thereby, let your emotions dominate the investment process. Secondly, this is where you have some control. I know from experience that many people have a difficulty working with an advisor simply because they feel they are losing control of their money. In my view, this is where to keep control - make sure the allocation model is well specified and that you are able to track it. Then you can have the advisor do the nitty-gritty work of buying and selling of the securities. Finally, recognize that over time you'll likely get more conservative (i.e. increase the bond exposure)in your allocation.
Tomorrow we'll look at Schwab's models. After we're comfortable with model selection, we'll go to step 2 of choosing investments.
If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at http://www.rwinvestmentstrategies.com. If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.