Asset Allocation

In the book, Investiphobia – You Can Invest Without Fear, you will not find any complicated investment terms or any guidance on how to invest your money. You will learn how to “invest without fear”. The book is helpful regardless of the method of money management you use. It does not recommend a particular investment approach or any particular type of investment.

I am in the process of writing the second book, tentatively titled; The Investiphobic Portfolio – What to Expect from your Advisor. This book will be in the format of a cookbook with chapters on individual ingredients (stocks, bonds, cd’s, etc.), prepackaged ingredients (mutual funds, ETF’s, variable annuities) and basic recipes that you could expect an advisor to choose based on their money management method and your investment objectives. It will contain specific guidance on the management of money and the types of investments that your advisor will most likely use in the management of your investments.

Many advisors use some form of asset allocation. The concept was created by economists who were studying various money management methods with the hope of reducing the risks associated with investing. Asset allocation is simply spreading your money across different types of investments so that a substantial fall in one might be offset by a rise in another. A common phrase that supports the concept of asset allocation is; “Don’t put your eggs in one basket”. The theory is based on using investments that tend to move differently when compared to each other. A simple example is putting a portion in stocks and a portion in bonds. Over long time periods, stocks tend to perform differently than bonds. Your advisor may break the stock portion down into large, middle, and small companies and add international and emerging markets to the mix. You might also add a small portion in commodities. Bonds may include short, intermediate, and long-term bonds, high yield bonds, and foreign bonds. The different types of bonds and stocks also have different performance over time. What your advisor recommends, as always, should be based on your individual goals.

In Michele Singletary’s July 5th column, she covers asset allocation and recommends a very good introductory book, Asset Allocation for Dummies. Like me, she doesn’t like the word “Dummies” but likes the series. I actually just bought Web Marketing for Dummies because I am a novice at blogging and creating “buzz” on the internet, so should you buy any book in the series, please don’t call yourself a “dummie”! Here is a link to her article, The ins and outs of asset allocation.

In the article, she writes, “I know a lot of people have pulled back from investing. I understand why. The stock market has been so frightful and the losses so great. Some investors have even declared that asset allocation failed them in the recent market downturn.” Her observations are shared by many and my book, Investiphobia, was written specifically to help investors avoid making decisions based on short-term time periods. Her article is very well worth your time. Asset allocation did not fully shield investors during 2008 because almost all broad investment categories fell. She points out, over the long run, asset allocation is a very good technique that is still valid for most investors.

Michele Singletary is a well-known, nationally syndicated, personal finance columnist and her column is carried by over 120 newspapers. She is also the author of several books and I recommend them to you. On my website, www.investiphobia.net, you will find her book, Spend Well, Live Rich, and my review under the Recommended Reading tab. You can subscribe to her newsletter by a free online subscription to the Washington Post. I recommend her column to anyone interested in learning more about personal finance.

As always, remember that money is not your life. It is simply the means to the life that you want!

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