Asset allocation can mean the difference
between a good portfolio and a great one
when technology stocks were making triple-digit gains it took a
lot of self-control to keep from selling those staid old blue chips
in your portfolio and turning them into hot tech shares. If you
held on to the boring blue chips it might have kept your portfolio
from tanking when the technology sector took a nose-dive and the
Nasdaq dropped by triple-digits.
That's why asset allocation can be the
deciding factor between a good portfolio and a great one. Ups and
downs in the stock market are a given, but the right mix of stocks,
bonds, cash and, possibly, alternative investments such as real
estate, futures and commodities can help you ride out the bad times
with less damage to your portfolio.
More than 15 years to go
If you have more than 15 years to go before tapping
your IRA, you should load up on stocks. Leila Heckman, managing
director of the Global Asset Fund at Salomon
Smith Barney in New York says young investors could even go
75 percent stocks, 25 percent bonds and no cash.
"They could split the stock portion between
value and growth, large and small cap -- have some international
and a little emerging markets."
If keeping that much money tied up in stocks
will make it hard for you to sleep at night, Heckman suggests a
60 percent to 40 percent stocks-to-bonds allocation, with more blue
chips and fewer tech stocks. For the bond portion of the portfolio,
Heckman favors a high percentage of government bonds with an intermediate
Liquidity, return, investment time frame, risk
tolerance and inflation are factors that need to be considered when
determining the right asset mix. Heckman says investors should expect
about 10 percent or 11 percent average annual return on stocks and
5 percent to 6 percent for bonds, depending on inflation.
"Asset allocation requires a certain discipline
and objectiveness -- lay out a plan. People often have trouble doing
that," says Heckman.
Education is important
Heckman also advises people to get some professional
help. That doesn't mean shelling out for a money manager, but at
least go to a seminar or take an adult education course in investing
or retirement planning.
"One of the biggest mistakes people make
is looking at the returns of mutual funds and go after whatever
asset class did best last year. If tech did the best they put all
their money in tech. One really has to have an asset allocation
plan and realize no one has a crystal ball. It doesn't mean it will
do well the next year. Stick with the asset allocation."
Asset allocation should be reviewed at least
once a year, and as you near retirement pare back on stocks and
put more into fixed income.
In addition to Salomon Smith Barney, a number
of other financial institutions such as Fidelity
Schwab offer asset allocation tools that
can help you make smart decisions.