Tuesday, May 15, 2012
Asset Allocation and why it does not matter
A nice rule of thumb when deciding your asset allocation is to take your age and either subtract it from 100 or 120 to get the percentage of stocks you should be holding. The remaining should be in bonds. However, you are also suppose to be building an emergency fund, possibly buying a home, or a car and those take savings. Do you count that savings in your asset allocation? Well you should but if you did you would not be able to buy a house, car or maybe even have the emergency fund you need. So what should you do? I have a goal for my asset allocation but to me, that is not the end all be all. Keep in mind Warren Buffet used to get made fun of because he held on to more cash that was considered appropriate so he would have the money for deals. Buffet is one of the riches men in the world and one of the few that made it big via the stock market. Right now my biggest asset is my home and conventional wisdom says to buy more stocks and bonds to balance it out but I am looking for another good deal in real estate. If I find it, I am buying, allocation be damned. This is not to say that asset allocation does not matter. I try to keep my stocks and bonds balanced depending on my age but I am not going to pass up a deal or not save for an emergency because of it. I do look at what kind of stocks I have and try not to have too much of the more risk stock, like small caps or emerging markets but I do not worry about it too much. I look at my allocation once to twice a year, that is it. Worrying about it is silly. At this point all I do is shove everything in my target date fund, ever since I rolled my 401k over to an IRA. Once I have over $25,000 then I will diversify on my own but even then the only difference will be a large international exposure and a little less bonds. I am willing to take a lot of risk as long as I have an emergency fund therefore until I am in my 50s my bond exposure in my IRA will be low. I do plan to put three months of saving in I bonds as a secondary EF after my three months of cash but that is a far away goal. I still have to pay off the student debt first. Does anyone keep a strict asset allocation or does everyone agree that it is a goal not an absolute?