Asset Allocation

The old rule-of-thumb was that your portfolio bond allocation percentage should be your age, and your percentage of equities should be 100 minus your age. Some advisors suggest your equity percent should be 120 minus your age, with bonds making up the rest. This may vary based on personal circumstances, particularly risk tolerance.

Bogle and others have suggested that a portfolio allocation may be as simple as 3 index funds; 45% Total market-US, 5% International stock fund EX-US(Not including US equities), 45% Total bond fund, with the remaining 5% in cash. You need to determine the right allocation based on your circumstances and risk tolerance.

I am no longer inclined to own actively managed mutual funds or individual stocks. If annual managed fund expenses are 1%, that amounts to a 30% cost over 30 years. Today, there are a few index funds with 0% expenses, and several with expenses as low as 0.03%. Long term, very few actively managed funds even match index fund performance, despite what sales people may claim. In recent years, pension fund money managers have been dumping actively managed mutual funds because they have failed to outperform passive investments like index funds.

Ric Edelman has written several books. In The Lies About Money, he lists 43 more complex portfolio allocations, based on a reader's age, comfort with risk, time to withdraw, and amount. This same asset allocation tool is also available online on his website. Ric Edelman is a successful, but expensive financial adviser.

Before adopting any suggested allocation, back-test it on one of the Internet simulators like the following, paying particular attention to how the portfolio behaved in 2008 and 2009: 
I found allocations that did not go negative, even in those years. Of course it is important to know that this is replaying and over-optimizing the past. Sill I found it a useful exercise.

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