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Personal Financial Planning Series May 2011 FIU Employee Financial Literacy Program. Investing for Your L ife S tage Asset Allocation. The Life-Stage Approach. The Life-Stage Approach. the ability to tolerate risk lessens as retirement approaches How do you determine your risk tolerance?

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personal financial planning series may 2011 fiu employee financial literacy program

Personal Financial Planning Series May 2011FIU Employee Financial Literacy Program

Investing for Your Life Stage

Asset Allocation

the life stage approach1
The Life-Stage Approach
  • the ability to tolerate risk lessens as retirement approaches
  • How do you determine your risk tolerance?
    • Insurance deductible
    • How much would you invest in an underwater salvage operation?
  • 100 – 54 (your age) = 46 (the percentage of your portfolio that should be in equity)??
places to go
Places to go
  • www.investopedia.com
  • www.financialengines.com
  • www.vanguard.com
asset allocation
Asset Allocation
  • “Modern” Portfolio Theory (Markowitz, 1952)
  • The Brinson Studies (1986)
  • Forces us to buy low and sell high!
for example
For example
  • $100,000 (20% large cap, 20% international, 20% small cap, 20% fixed income, 20% cash)
      • $20,000 in the large cap bucket
      • $20,000 in the international bucket
      • $20,000 in the small cap bucket
      • $20,000 in the fixed income bucket
      • $20,000 in the cash bucket
the rebalancing
The rebalancing!

Our objectives have not changed, so we are still invested 20% each in 5 sectors.

Six months later our portfolio looks like this:

  • $27,000 in the large cap bucket
  • $22,000 in the international bucket
  • $18,000 in the small cap bucket
  • $23,000 in the fixed income bucket
  • $20,500 in the cash bucket
slide8

Our portfolio has grown to $110,500 or 10.5% in six months…

  • Your gut tells you to leave your money in the large cap fund, but asset allocation forces you to rebalance, so that each sector once again has 20%, which now is $22,100.
    • Remove $4,900 from the large cap bucket
    • Add $100 to the international bucket
    • Add $4,100 t0 the small cap bucket
    • Remove $900 from the fixed income bucket
    • Add $1,600 to the cash bucket