A Simple Approach to Asset Allocation

Serious investors spend a lot of time deciding which stocks or mutual funds to buy. This is appropriate. If you are going to invest your money, you shouldn't do it without some research and thought.

On the other hand, some financial gurus maintain that it is far more important to make an effort to achieve an effective approach to asset allocation. They believe that you should place your emphasis on how much of your portfolio is invested in such sectors as:

Government bonds
Corporate bonds
Municipal bonds
Convertible bonds
Preferred bonds
Large-cap domestic stocks
Small-cap domestic stocks
Foreign stocks
Foreign bonds
Certificates of deposit
Annuities
Money-market funds

There are probably a few other categories you could include in your portfolio, and examining this list gives you an idea of what is meant by asset allocation.

The importance of asset allocation is in understanding how it can help or hurt you during certain investment periods.


A Simple Approach to Asset Allocation

From the above, you can see that asset allocation, like everything else in the world of finance, can get rather complex and confusing. It is no wonder that many people don't delve into this too much.

Here is one such approach by an investor.

"My idea of investing is to make it simple. There are just so many hours in the day. If you are still gainfully employed, you probably work eight hours in the day making a living. In the evenings, you may spend a few hours a week reading journals and other material so that you don't get fired. Obviously, that doesn't leave much time for studying the stock market.

For my part, I don't invest in many small-cap stocks, foreign stocks, bonds, convertibles, preferred stocks, or most of the other stuff on this list. I prefer to invest mostly in big-cap stocks (such as ExxonMobil, GE, Merck, IBM, Procter & Gamble, and Johnson & Johnson) and money-market funds (a safe alternative to cash).

This reduces my categories to two (2), not a dozen. All you have to do is decide what percentage of your portfolio is in stocks. The rest is in the money-market fund. Of course, the percentage is vitally important."



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