Is Your Asset Allocation “Healthy”?
I saw this great image of an asset allocation pyramid over at Oblivious Investor (he gave everyone carte blanche to use it), and I thought I’d share it, with my thoughts:
This represents what might be called a “healthy” asset allocation in most cases. Now, of course, everyone is different, and your individual situation may call for a different asset allocation. But, for the most part, you are likely to do fairly well if you pay attention to this investment guide.
Bottom of the pyramid: Stock funds. As you can see diversified stock funds are the base of a health investing portfolio. This is because, over time, the stock market offers the highest, most solid returns for the money. Any long term investing plan should include stocks in the form of funds.
Level two, pyramid: Bond funds and real estate. As one might expect, more people are focusing on the bond funds right now, since they are safer. Indeed, these “safe” investments should be one of the ways that you are able to get some small returns (even though they don’t quite beat inflation right now) — the main idea, though, is to protect principal. Real estate is on this level as well, since it can be a good investment if you hold on to it for the long term.
Level three, pyramid: I like that the emergency fund is included in this level. I would go so far as to add a CD ladder in this area as well. An emergency fund in an interest bearing account is, in fact, an investment — after all, it does yield returns. And this level also includes individual stock picks. Be careful of these, since they mean that there is less diversity, and less room to pick wrong than in stock funds.
Top of the pyramid: Finally, the top of the asset allocation pyramid consists of the speculative and volatile investments like commodities and collectibles. I put futures and currencies in this category as well, since they can be equally risky. You should devote only a small portion of your investment portfolio to these volatile investments.
Following the asset allocation pyramid probably won’t make you wildly wealthy in a short amount of time, but it increases your chances of a comfortable future.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
