Despite the very large number of securities available to investors, it turns out that investment results are dominated by asset allocation more than individual security selection – because individual security impact gets reduced through portfolio effect of diversification.
Getting the asset allocation to match one’s objectives and risk preferences becomes a very important part of a good investment process. In fact, a simple solution that is appropriate to many investors is to pick a low-cost target date fund that corresponds to one’s retirement horizon. This is one of the under-appreciated benefits of modern financial solutions. A simple, easy to understand low-cost solution that will beat most solutions offered and used by investors. No matter how one looks to manage a portfolio, seeing and managing the asset allocation is important.
What is the right asset allocation for you?
Not easy to answer but there are reasonable starting points. One can start with the assumption of 100 being your target age, or adjust it based on personal preferences. Thereafter one can look at the age-based allocations by large providers of target date funds like:Vanguard – very good track record
Blackrock – the largest investment manager in the world
JP Morgan – currently the financial institution with the largest market capitalization in the world
It is good to think about how one is different from the average and why these providers recommend what they do. This can help you arrive at the best match for one's circumstances and preferences.
Asset Allocation is primarily a function of age of client and spouse. Recommended Asset Allocation and Existing Asset Allocation results in recommended asset allocation shifts
After asset allocation is determined, pick from ranked investment list till available amounts are filled within each asset category.
Tax rates affect the ranking of investment choices. Liquidity Requirements are prioritized first, followed by reduction of debt.
