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Money Girl
069 MG Asset Allocation
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Card has no cash access and expires in six months. This is guest host Andrew Horowitz, author of The Disciplined Investor. And today on Money Girl, I will be discussing the importance of asset allocation and how it alone can shape your financial future. Do you want to start investing, but don't know where to start? Are you already investing, but think that your portfolio has too much volatility? A listener writes in, "I have a 401(k) plan, a few bank accounts, mutual funds, and some real estate. It seems that all of my investments are going down on a regular basis, and I hate to open the mail when it's statement time." Hmm. "How do I put together a plan that I can stop worrying about? It is really starting to get to me." Well, thanks for that question, it's a great one and very timely. Okay, let's start off with one of those fancy financial terms, break it apart, and then figure out how we can make it work for your situation. The term, asset allocation. This is probably one of the most important parts of the portfolio planning process. Your portfolio needs to be a mix of several different asset classes, many different investment vehicles, and different types of industries. These can include things like money markets, bonds, stocks, real estate, precious metals, luxury items, and maybe even foreign currency. If we roll up our sleeves a bit and delve even deeper into the portfolio logistics, we can further separate each asset into classes by size, maybe large cap, mid cap, and small cap, as well as style, such as growth, blend, or value. What is in your portfolio is a matter of personal preference and should be carefully planned to weigh out the amount of risk that you're willing to accept. But as long as you have an asset allocation roadmap planned out, that part is much easier. The one word you will likely hear most when talking or reading about asset allocation is diversification. Basically, it's just another one of those fancy financial terms that simply means spreading your assets out amongst various different sectors and classes in order to reduce risk. So why should you have a diversified portfolio? Wouldn't it be just better to jump in on a hot stock and put all your money into that? Or maybe even buy a few parcels of land and develop that? The short answer is that it is rare that any two markets will be soaring at the same time. Thus, you might have all your money in real estate and the market tanks, like it just did. What then? Not a pretty picture. By diversifying your portfolio, you are reducing the risk of loss during market setbacks. If one market fails, well, it's okay, because you still have other groups of asset classes that will hold up and chances are that while one may be in trouble, another one will be moving up in value. 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One stock trader even told me, and I quote, "normally I just buy and sell, but this I'm going to eat." Experience the Jeff PBC hype today. In my book, The Discipline Investor, I talk about a portfolio and compare it to a flower garden. If your garden is full of impatience, it will look gorgeous when it's in full bloom. But if you live in Florida like me, during the summer they will be a dead pile of rotting muck. On the other hand, if you have a garden with some impatience, some rose bushes, and even a few evergreens like money markets, and maybe a few annuals and perennials, something is sure to be in bloom at any given time of the year. That is how your portfolio should be as well. The trick is to have investments with different risks and styles, sectors, and in different regions to allow for profits to bloom over time. Another important factor to consider in planning your asset allocation is your timeframe. Are these investments going to be lifelong commitments, or do you plan on changing or trading them throughout the year? The longer your projected timeline is, the more risk you can take because you'll be able to wait out the various investment cycles. The asset allocation process helps you weed and feed your garden, so if one asset drops, you may want to bring that back into alignment by shifting monies into the lower cost ones. Since you may be in no rush to withdraw your money, it will have plenty of time to recover, and your lower basis may help to add profits down the road. This type of disciplined investment process can have some amazing long-term benefits and set up a happy retirement if properly planned and tended to. Remember, asset allocation is one of the first and one of the most important components when planning your portfolio strategy. It has been proven that what's in your portfolio is important, but not nearly as important as your diversification and the division of assets. Cha-ching, and that's all for now. Courtesy of Andrew Horowitz, your guest host for Moneygirl's quick and dirty tips for our richer life. And thanks for Bill and Lilac for sending in questions on asset allocation. We're going to send you a copy of my book, The Disciplined Investor, Essential Strategies for Success, for helping us with this episode. This is Andrew Horowitz sitting in for the Moneygirl. Listen to my weekly podcast, The Disciplined Investor, also available on iTunes. More information on asset allocation and how to balance your portfolio is available on the quick and dirty tips website. As always, everyone's situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only, and is not intended to be a substitute for seeking personalized professional advice. Thanks for listening. Introducing Wendy's new Salsy Nugs, the nugs you love, covered in your favorite sauces. So no matter what flavor you're craving, Wendy's has you covered. Grab Wendy's new Salsy Nugs today. Open till midnight or later. That participating U.S. Wendy's, ours may vary by location. [BLANK_AUDIO]