What does it mean to have balanced investments, and how do you do it? What is a proper asset allocation?  I first tried to answer these questions about six months ago (maybe longer) and finally think I’ve got it figured out… kind of.  Still, do note: this is not intended as a tutorial, just a jumping off point for a discussion. (Pictured: Kate Spade New York Carmine Street – Lacey Wallet, available at Nordstrom for $158 in green, pink, and black.)

Why You Should Balance Your Investments

First — why should you balance your investments, or allocate your assets?  I read Ramit Sethi’s I Will Teach You To Be Rich a while ago — a great introductory book if you’re new to financial stuff, and definitely a quick read.  One of the only things that was new to me was his explanation of how and why to balance your investments, which I’d heard about through the years but never really focused on.  (To be honest, I kind of thought all I needed to know was that bit about subtracting your age from 100 and putting that percentage in stocks, which roughly translated to me as “invest mostly in stock index funds.”)  In Sethi’s book, he talks about how you should have a target asset allocation (also quoted on his website) of something like 15% TIPS, 15% Government bonds, 20% REITs, 5% emerging-market equities, 30% domestic equities, and 15% developed world international equities.  Whoa! That’s a bit different than “mostly stocks.”  But I suppose it’s easy enough to figure out, at least if you’re just setting up your investments for the first time.  So, let’s say you invest accordingly, and in that first year, domestic equities do AMAZING and emerging-market equities have a lousy year — so at the end of the year you may end up with 60% of your holdings in domestic equities and only 2% in emerging-market equities.  So, Sethi says, at the end of each year you should figure out what your target allocation is and then readjust so that you’re putting something like 20% into emerging-market equities and only 10% into domestic market equities.  Uh huh. Ok.  Simple! [Read more...]