Barbara Friedberg has been running a 5-part series on asset classes investing on her personal finance blog. In Part 3, “What is Risk Tolerance and How to Figure Out my Asset Classes Allocation,” Barbara gives some good thoughts on asset allocation. People with a high risk tolerance should hold more stocks, for possibly greater return, and people with a low risk tolerance should hold more bonds, so they will not lose as much in a large market downturn (they also will not make as much in a bull market, but that is the tradeoff).
I am highlighting Barbara’s post, because your asset allocation is one of the most important parts of setting up your portfolio. Here are some thoughts on asset allocation from some of the most renowned people in economics,
John Bogle, author of Common Sense on Mutual Funds: “Asset allocation is critically important; but cost is critically important, too—All other factors pale into insignificance.”
Frank Armstrong, CFP, AIF, and author of The Informed Investor: “The impact of asset allocation or investment policy swamps the other (investment) decisions.”
Jonathan Clements, author of three financial books, Funding Your Future; Twenty-Five Myths You’ve Got to Avoid; and You’ve Lost it, Now What? “Forget Wall Street’s exotic garbage. Instead, stick with stock, bond, and money market funds.”
Walter Good, CFA, and Roy Hermansen, CFA, co-authors of Index Your Way to Investment Success: “Development of a long-term investment plan constitutes the most important single investment decision that you are likely to make.”
Professor Burton Malkiel of Princeton University, author of Random Walk Down Wall Street: “The most important decision you will probably ever make concerns the balancing of asset categories (stocks, bonds, real estate, money market securities, etc.) at different stages of your life.”
John Merrill, author of Outperforming the Market: “Your portfolio mix of asset classes will be far more important in determining its performance than will be your selection of individual securities or mutual funds.”
Jane Bryant Quinn, author of Making the Most of Your Money: “People don’t pay a lot of attention to asset allocation, but it’s the key decision that determines your investment success, not how smart (or dumb) you are at picking stocks or mutual funds.”
Bill Schultheis, author of The Coffeehouse Investor: “The most important factor when diversifying is to adhere to your asset allocation strategy, because when you stick to your strategy and rebalance your assets at year-end, buy and sell decisions are no longer arbitrary.”
Charles Schwab, founder of the Charles Schwab brokerage company, and author of Charles Schwab’s Guide to Financial Independence: “Choose your asset allocation model carefully. Asset allocation is the biggest factor in determining your overall return.”
Vanguard has an asset allocation questionnaire that may help you to define your asset allocation.
They also provide a table of portfolio allocation models ranging from 100% bonds with zero stocks, to 100% stocks and zero bonds, that provides some good statistics on the average earning potential, as well as largest annual gains and losses for various asset allocations.