Investment Help

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 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.

Thursday, March 3, 2011

How to do an Asset Allocation

On Monday DIY Investor discussed why you should index, Tuesday was about how to index, Wednesday was about how to rebalance the portfolio, and today is the all important topic of asset allocation. This is where it begins. This is figuring out the percentage to invest in stocks and bonds. Assuming you are well diversified, which you will be as long as you stick with low-cost, index exchange traded funds, the most important determinant of your performance will be your asset allocation.

Start as always by puttering around on your broker's site. Fidelity, Schwab and many others offer asset allocation tools to help the do-it-yourself investor. They also typically will have information sources to answer questions.

Here's the scoop:  asset allocation is not as scientific as many advisors would have you believe. In fact, meet with 3 advisors and you'll come away with 3 different asset allocation plans. In the same vein, look at similar life cycle funds and you'll come away with different recommended allocations.

The appropriate allocation for an individual is determined by answering a series of questions that seek to determine the capacity to take risk, risk tolerance, the need to take risk, and so forth. Some of the questions are hypothetical, i.e. they are "what if" types of questions. For example, if an investment drops 25% in value, would you hold, buy more, or sell?  Some of the questions are more deterministic--for example, how many years until you retire and start to draw down your assets?

The bottom line is to come up with an asset allocation plan that you will stick with. To achieve the long-term performance you need, you probably have to take risk; but taking risk means you head into choppy seas. If you bailout when the going gets rough, you won't achieve the longer term positive results of an upward market.

The period 2008 and early 2009 is a good example. In 2008, the stock market was down more than 35% and hit a bottom on March 9,2009. At that time,  the S&P500 reached a level of 676.53. Today it stands at 1308.44. Many missed the sharp upturn because they bailed. The moral of the story: get a plan you can stick with.

The fact is that people today manage their own assets and have been put in a position where they have to take risk with their assets to achieve their retirement goals. The key is learning how to manage this risk. Appropriate asset allocation is how they do this.

There are many asset allocation tools on line. These involve calculators and questionnaires. DIY Investor believes that, by playing around a bit and studying them, many people can do their own allocation; but, if this makes you uncomfortable, then definitely seek professional help. It will be money well spent. In any event, seeing what is available to the do-it-yourselfer will expose you to the type of questions you need to answer.

Asset Allocation Calculator

This calculator takes 10 minutes to complete but is a useful starting point:


Note the questions. Obviously it assumes a retirement age in the middle 60s, takes into account assets, how much you save, and whether you need income off of your assets. It assumes you know your risk tolerance. We'll look at that later. It also asks for your economic outlook. DIY Investor would just leave that in the middle because markets sometimes tend to perform best when the outlook is the poorest. So slide the carrot around for the various questions to fit your situation. The outcome will be something like the following:

With this in hand, you can easily go to the next step of buying the appropriate low-cost index ETFs as described in earlier posts. But admittedly this is very basic,, and it assumes you know your risk tolerance which is a big part of this process. So let's take one more step and look at an online "risk tolerance" questionnaire.

This is where people sometimes have problems because the questions are hypothetical "what would you do if..." type of questions. I recommend strongly that you consider what you have done or wanted to do in the past. If you were invested in 2008, what did you want to do? Did you constantly feel like you wanted to sell? Or, did you feel it was a great buying opportunity? Maybe, in fact, you just held on and it didn't bother you overly - you felt everybody was in the same boat and you had time to come back. Thinking through how you felt and acted in the past is a great aid in completing a risk tolerance questionnaire.

MSN Money offers a 20 question risk tolerance questionnaire. Again, look at the questions. They are pretty standard from test to test and give you a good idea what you should be thinking about. By looking around on line (i.e, googling the appropriate phrase), you'll find a number of calculators and questionnaires similar to the ones mentioned here. Use them to the extent of your interest.

Some  typical questions (source MSN Money):
  1. You take a job at a fast-growing company, where you are offered these choices. You pick:
  2. a five-year employment contract.
    a $25,000 bonus.
    a 10% pay increase on your $100,000 salary.
    stock options (the opportunity to buy company stock at a set price) with a current value of $25,000 but the chance for appreciation.

2.       You invest $10,000 in a stock that drops 10  percent in value the following day. You:
    put in another $10,000 while it's down.
    sit tight because you did the research.
    sell and go back to certificates of deposit.
    wait for the stock to regain the $1,000 loss, then sell it.

Still, from a bottom line perspective, there are a few points DIY Investor feels, again, should be emphasized and kept in mind. The asset allocation process isn't as scientific as most advisors would want you to think. How you answer the questions depends on your very recent experience. If the market has risen over the past six months, most people score higher on the questionnaire, i.e. are more tolerant of risk and vice versa. Secondly, go to different advisors and you'll come up with different allocations. They probably won't be radically different overall and would be in the ball park with what you would get online by doing it yourself. After all, asset allocation is about positioning appropriately for the future.

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize RiskFor those who want to know more than their advisor, have moved past the novice stage, and enjoy understanding the foundations of an investment, the one I would highly recommend is The Intelligent Asset Allocator by William Bernstein.

Disclosure:  This information is for informational purposes only. Individuals should do their own research and consult with an advisor as necessary.


  1. Asset Allocation is what index investing is all about to my way of thinking. I highly recommend the Bernstein book.

  2. @The Grouch Agree. This is, in my opinion, what most investors should be spending time thinking about rather than researching individual securities.

  3. Pick one and stick with it! Nothing can be more damaging to your portfolio than changing strategies midway.

    Good resources Robert!

  4. @MoneyCone Exactly right. Unfortunately too many people put the cart before the horse by investing first and then thinking about asset allocation.