By in Asset Allocation, Bond, Investing, Mutual Funds, Stocks | 15 comments


MBA Series #1

“Don’t put all of your eggs in one basket.”

The beginning of the year is portfolio rebalancing time for investors. I write a lot about investing as I believe it is an achievable path to long term wealth. If you don’t know what asset allocation is or much about investing at all, then this article is for you.

Modern Portfolio Theory is the science that drives most of the writing about investing today. As I put the finishing touches on the university class I’m teaching this winter in Investments, I’m going to share some of the basics with you; FOR FREE!

Tried and True Investing

Diversification in investing means don’t put all of your money in one investment or one type of investment.


When that investment goes down, there goes the value of your invested assets-down.

Buy different types of investments, so that when one goes down in price, the others may go up, or at least remain stable.

Diversification smooths out the ups and downs of the value of your investments.

For example, it is rare for bonds and stocks both to go down at the same time. During the past decades bonds have outperformed stocks, an historically unusual occurrence. Over long periods of time stocks have outperformed bonds, but a combination of both asset classes reduces your portfolio volatility.

There are all types of asset classes such as, international stocks, country specific stocks, small cap stocks, commodities, real estate, corporate bonds, government bonds, international bonds and many more. All of these types of assets can be bought as individual holdings, or combined in mutual funds and exchange traded funds (ETF). But, you don’t need to worry about the wide variety of asset classes unless you are passionate about investment management. You can obtain a satisfactory amount of diversification with just  two ETFs or mutual funds.

Asset Allocation means selecting specific asset classes and choosing the percentage amount invested in each asset class. The chart above illustrates a simple asset allocation model.

Simple Portfolio Management

The research abounds that a basic asset allocation of a certain percent in stock investments and a certain percent in bond investments has led to long term wealth creation.

With annual rebalancing to make sure the percentages in each asset class remain in alignment with your stated preference, you can grow your assets with little time spent in managing them.

Index funds and ETFs are perfectly suited to a simple and effective portfolio management approach. The two asset portfolio shown in the chart above combines a world stock market index ETF with a total US bond fund. Depending upon your age and risk tolerance, place more or less in each asset class.

Rebalance your portfolio at the end of the year to get back to your originally selected asset allocation. In other words buy or sell from each holding to get back to the desired percentage amount invested in each fund. Paul B. Farrell of Market Watch has a wonderful series called the Lazy Portfolios with several asset allocations and performance metrics. For more ideas on this topic, it’s worth a read. The ten year annual returns of the 8 Lazy Portfolios ranged from 4.8% to 6.8% versus a ten year return of the S & P Index of 2.86%.

Consider this easy approach to investing to grow your wealth over time. This method is ideally suited for use with a workplace retirement fund.

For more on this topic, subscribe to my Wealth Tips Newsletter and receive a free ebook, 20 Minute Guide to Investing. (Sign up on the right)

Caveat; This article is for information purposes only and is not a recommendation to buy or sell any specific securities. For investment advice see your own personal advisor.

If You Can’t Get Enough Asset Allocation, Here’s More

Asset Allocation by Age at Couple Money

Doug Warshau wrote about Asset Allocation for People in their Twenties at Sweating the Big Stuff

The Absolute Importance of Asset Allocation at Money Help for Christians

My Personal Finance Journey shares his Asset Allocation

For those asset allocators out there, what is your asset allocation and why?



  1. Simple is always better Barb! Ted Aronson, the famous money manager, manages investments that run to billions of dollars for his clients. Yet, when it comes to his own family’s wealth, he puts them all under an indexed portfolio!

    Something to think about!


    January 9, 2012

  2. @Money and Joana- Many portfolio managers use a basic asset allocation model with index funds and etfs. Science is behind this approach!


    January 9, 2012

  3. Yes, asset allocation is such an important lesson. It is so easy to do the simulations and think this can’t be easier, but then when all of YOUR investments plummet, there’s not ecstasy on your face. Going with a good solid strategy including proper asset allocation is definitely better.

    Roshawn @ Watson Inc

    January 9, 2012

  4. Good timing! I generally look at my asset allocation annually in Deceember and make my changes for the new year.


    January 9, 2012

  5. @Roshawn, Although is sounds really easy in theory, even I have a difficult time sometimes making the changes. Fear and greed are powerful emotions!
    @Krantcents-That’s a great time, it’s hard to forget the beginning of the year.


    January 9, 2012

  6. Asset allocation can make a big difference in what one has for retirement or other major life needs. It’s important to make and save money first, of course. But ignoring asset allocation is like a football player rambling to the goal like without gripping the football tightly. Not paying attention to the details can cause a fumble, which is what having the wrong asset allocation can do. Best to do what’s right for each of us at different stages in our lives.


    January 10, 2012

  7. @Squirrelers, How aptly put. In fact, I’ve read that 90% of ones returns can be attributed to their asset allocation.


    January 10, 2012

  8. There are mutual funds that allow you to setup your desired allocation once and have it automatically re-balanced each quarter. I’ve never used them because I enjoy controlling the re-balance, but they are available.

    Marie at FamilyMoneyValues

    January 10, 2012

  9. Marie, You really need to watch out for “asset allocation funds,” as they all vary and rebalance in differing ways with various allocation. They frequently sport higher fees than vanilla index or ETFs, but thanks for bringing up the topic.


    January 10, 2012

  10. Having the asset allocation is great but not keeping up with rebalancing is what can really get you in trouble. There are a few studies out that all show 100% equities are inevitable without rebalacing.

    JP @ Novel Investor

    January 10, 2012

  11. Hi JP, Actually, you will not end up with 100% equities if you don’t rebalance if you started out with some percent in fixed or other asset classes. But, if stocks continue their historical outperformance, they will dominate your portfolio without rebalancing.


    January 11, 2012

  12. Hi Dan, Well, I guess that is better than nothing. But, for anyone with a 401 (K) or 403 (B), it’s best to educate oneself a bit about basic investing.


    January 12, 2012

  13. Okay, I love it when you said “If you can’t get enough asset allocation, here’s more.” Hahahaha! Love it. Enthusiasm is contagious:).

    Amanda L Grossman

    January 12, 2012

  14. Barb,

    What type of asset allocation between equities and fixed income would you recommend in 2012 for someone who is mid-career, and a moderate risk taker?



    Financial Samurai

    January 14, 2012

  15. Sam, I really like to help others become wealthy, and your question is superb. There’s just one problem, it’s a really tough one! I don’t have enough information to give a really helpful answer for one’s individual situation. I’ll share a personal story instead. When I was mid career, I was about 65% equities and 35% fixed. And I consider myself a moderate risk taker. I’d also check out the Lazy portfolios link above for some great sample asset allocation. And, my 20 Minute Guide to Investing (top right, free with Wealth Tips sign up)also has some ideas.


    January 14, 2012


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