Our Financial Dream
As you saw in this week’s Monday Money Minute, we recently realized a financial dream. It’s a financial dream we want you to experience, too. We want your money to do more than just pay your bills. This means your money must work for you and not just have you work for your money.
To get your money to work for you requires two components. The first component is to have a financial plan, as we said Monday. Assuming that everyone knows any righteous financial plan includes investments, the second component is to have the proper investment allocation. That’s proper investment allocation, not proper investment schemes, because a proper investment allocation is more like baking than cooking.
Be a Better Investor
How should you allocate your investments? It’s a good question because financial advisors are paid more than they’re worth to create a proper investment allocation.
Our first recommendation for a proper investment allocation is to not suck. People who suck are seven times more likely to suck at choosing the right investment allocation than people who don’t suck. There’s no scientific proof for this, but the grouchy, old man in my building hears me. Don’t you?
There are a million and one ways to allocate your investments. No one strategy is perfect for everyone or anyone all the time. Some investment allocation strategies are better than others depending on you, your investment goals and life stage.
Below are three investment allocation strategies we think are worthwhile to consider for your investment allocation.
Three Investment Allocation Strategies
- 60/40 Rule – This is such a simple and basic strategy you could buy it at JC Penny. Invest 60 percent of your investable portfolio in stocks and 40 percent in a combination of bonds and cash or cash equivalents.
- 100 – Your Age – Subtract your age from 100 and the difference represents the percentage of your assets that should be in stocks. The residual represents the percentage of your assets that should have invested in bonds and cash or cash equivalents. For example, if you’re 25, shut up! Then, subtract your age from 100. Unless you’re using Common Core, you’ll easily get 75. 75 represents the percentage of your assets that should be invested in stocks with the residual 25 percent of your assets in bonds and cash or cash equivalents.
- Time Horizon – This is like The Kinsey Scale of Sexuality, but for investments. The further you are from your financial goals, the more stock investments you should hold. As you gradually achieve your financial goals, you should gradually decrease the percentage of your assets invested stocks and replace them with bonds and cash or cash equivalents. Mutual funds that use this strategy often include dates in their names, such as Target 2020 or Lifecycle 2030.
These strategies are not as simple to execute as they are to understand, though. Picking stocks and managing stock portfolios are pains. This is why we recommend a proper mix of a few mutual funds or ETFs if you choose to not overpay a financial advisor. Mutual funds and ETFs use money managers to manage their portfolio mix for a reasonable price, but requires research.
There are millions of other strategies. Even if you do hire a financial advisor, do your research. You want to be able to talk mano y mano and you don’t want someone to Madoff with your money.