A Customized Approach to Asset Allocation

In reality, the type of assets you own should be matched to what you personally need to accomplish. The design of your portfolio must be based on your specific needs. Another priority is to create a customized game plan that minimizes your fees and tax liabilities. A one-size-fits-all approach to asset allocation can be disastrous.

CORE AND EXPLORE

  1. Asset Allocation will be the biggest factor in determining your investment returns. So, deciding on the right balance of stocks, Bonds, and alternatives is the most important investment decision you’ll ever make. Make sure you diversify globally across multiple asset classes. Never bet your future on one country or one asset class.

  2. Use Index Funds for the Core of Your Portfolio because they give you broad diversification in the most low-cost, tax-efficient way. They beat almost all Hedge Funds and Mutual Funds over the long run. For maximum diversification, we want exposure to stocks of all sizes: large-cap, midcap, small-cap, and microcap. By diversifying so broadly, you protect yourself against the risk that one part of the market might get crushed. By indexing, you enjoy the long-term upward trajectory of the market without letting fees & taxes corrode your returns.

  3. Always Have a Cushion. You never want to be in a position where you’re forced to sell your stock market investments at the worst moment. So it makes sense to maintain a financial cushion, if at all possible. Collect an appropriate amount of income-producing investments such as Bonds, REITs, MLPs, and dividend-paying stocks. Diversify broadly within these asset classes. If your stocks crash, you can sell some of those income-producing investments (ideally bonds, since they are liquid) and use the proceeds to invest in the stock market at low prices. (This puts us in a strong position where we can view the Bear Markets as a friend rather than a fearsome enemy.

  4. The Rule of Seven. The Investment Goals is to have seven years of income set aside in income-producing investments such as bonds and MLPs. If stocks crash, we can tap these income-producing assets to meet short-term needs.

  5. Explore. The core of your portfolio should be invested in index funds that simply match the market’s return. But at the margins, it can make sense to explore additional strategies that offer a reasonable chance of outperformance. Look outside of just the Stock Markets for investment opportunities

  6. Rebalancing Bring your portfolio back to your original asset allocation on a regular basis. At least once a year.