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Choosing my asset allocation goal

November 16th, 2008 at 08:00 am

From the short quizzes in the Perfect Portfolio book, I was rated to have a moderate risk tolerance (3 on a scale of 1-5), and a moderately aggressive risk profile (2 on a scale of 1-5). I think the risk tolerance quizzes actually tend to underestimate my true tolerance -- I didn't bat an eye when my portfolio dropped $200k in the recent downturn.

So I've decided that a growth allocation is my goal. Here's the starting point that the book recommends:
Goal: Growth
stock: 60%
bond: 20%
cash: 10%
real estate: 5%
commodity: 5%

Given my age, I think that's far too much in bonds and cash. It was a hard sell to convince me that bonds are necessary at all, but The Intelligent Asset Allocator made a really good case for holding 10% in bonds. One thing that I'm never sure about is whether to count our checking, savings, and emergency fund in the cash portion or not. I plan to exclude it just to make the calculations easier (so I can just put the funds in x-ray and ignore the other accounts.)

Here's what I think I'll aim for:
My target:
stock: 75%
bond: 10%
cash: 5%
real estate: 5%
commodity: 5%

I've been interested in adding a REIT at some point, and based on the book's advice I think I'll do it within my SEP-IRA.

The book had very little advice about how to allocate the stocks within the catagories (small, mid, large cap; value, growth, blend), so I still need to make some decisions in that area. I think it's possible we may be entering a decade with little growth, so I will lean toward mutual funds that generate dividends.

I'll come back and edit this post later with my actual current allocation once I run the numbers through x-ray.

2 Responses to “Choosing my asset allocation goal”

  1. jIM_Ohio Says:

    That AA makes sense- you want cash so when the market drops you can buys more and improve your IRR. Tilt the bonds towards corporate right now and I think you will also see some return boost.

    I am adding REITs as an asset class in January (T Rowe has a new fund which wife will use in her IRA).

  2. Broken Arrow Says:

    I like the look of the AA as well.

    One thing about REITs. Some are specifically concentrated to certain geographical locations or industries, whereas some are not. Not all REITs are created equal.

    Not that you need to hear this from me, but obviously to read the prospectus to make sure you know what you are buying and it is acceptable to you.

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