Comments on: Why Allocations Make A Big Difference

By: Dividend Growth Investor

Dividend Growth Investor — Mon, 15 Sep 2008 13:08:15 +0000

Asset allocation is important, since if you do it properly you will be diversified and won’t have all your eggs in one basket.

The way that I approach my portfolio however is by focusing on the dividends and interest that I could earn from my investments rather than the total returns. I disagree with conventional retirement wisdom that one has to be concerned with total returns and should sell part of their stocks each year in order to live off the investments.

If you focus on the dividend and interest portion and you try to consuct a portfolio that could generate increasing amounts of annual income to you, then the whole “risk” parameter is not as important.

By: Financial Planners at Respond

Financial Planners at Respond — Mon, 15 Sep 2008 09:30:03 +0000

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I completely agree with this statement. Thanks for the great post.

By: Kevin

Kevin — Sat, 13 Sep 2008 16:26:25 +0000

Good presentation on a sometimes difficult topic to explain, Trent.

By: jim of Blueprint for Financial Prosperity

jim of Blueprint for Financial Prosperity — Sat, 13 Sep 2008 13:20:25 +0000

Asset allocation is huge, as evidenced by the numbers (and that was for only 5 years). One other thing to remember is to not get TOO lazy when you go with target retirement funds, you’ll still want to check them out every couple of months to make sure everything is on track.

By: Todd A

Todd A — Sat, 13 Sep 2008 05:11:55 +0000

I know when I reach my “target” for “retirement”, the only risk I want to have to diversify, is how to maintain FDIC insurance on my accounts !

By: Adam

Adam — Sat, 13 Sep 2008 01:19:36 +0000

Please excuse the n00b:

When you say “move” the funds to a safer investment, you mean sell the more risky investment and by the less risky one in its place?

If you perform this transaction within the retirement account, do you have to pay dividend taxes for the amount you have sold?

By: Mark L

Mark L — Fri, 12 Sep 2008 23:50:25 +0000

The only problem with targeted retirement funds is that they assume that you will want most of your nest egg funded at the target date. However, if you are retiring at 60, you will likely live another 20 years. Since all 10 year periods of the stock market have made money, you don’t want to pull everything out of stocks at 60.

You have to plan your investments for your post-retirement as well.

By: SP

SP — Fri, 12 Sep 2008 22:40:39 +0000

I must chime in to note, a retirement fund with a 2025 date doesn’t expect to be fully drained in 2025, the way it would be for a house. It has to support the retireee for the next many years.

I would expect most funds still have some equities at their “date”, which you wouldn’t want for more short term goal that would be quickly depleted when the date arrives. But I haven’t checked that.

By: Cory

Cory — Fri, 12 Sep 2008 21:47:31 +0000

Doh! Never mind. I just noticed the minus (-) sign before the 10.05%.

By: Cory

Cory — Fri, 12 Sep 2008 21:46:23 +0000

“Over the last year (September 1, 2007 to August 31, 2008), the bond index returned 5.66%, while the stock index returned -10.05%”

If stocks returned over 77% more than bonds, how come investing 100% in bonds would have returned $1,571 more? Just when I start to think I am starting to understand investing something like this comes up.

By: Chris

Chris — Fri, 12 Sep 2008 21:10:36 +0000

Good post Trent, asset allocation is one of the more important subjects in portfolio theory. 91% of a portfolio’s variability can be attributed to asset allocation, not individual securities. Unfortunately, people can go cross-eyed when when you get into the weeds of 10% in REITs, 5% is foreign small cap value, 8% in commodities… Or should I be in commodity companies?? What about currencies, ETFs or ETNs etc., etc., etc., ARGH!!!

I kind of like the idea of target date funds. On the whole, though, I believe they underperform for some strange reason. I do think they are a great way to save us from ourselves, though.

By: ChrisB

ChrisB — Fri, 12 Sep 2008 20:29:32 +0000

The only caveat to that, Tyler, is tax-efficiency… some funds are (much) more tax-efficient than others, and one should be attentive to that in investing in taxable accounts. Year-targeted funds, for instance, are often less tax-efficient that others, and there might be more tax-efficient ways to invest.

By: Tyler @ Dividend Money

Tyler @ Dividend Money — Fri, 12 Sep 2008 20:11:51 +0000

I’d like to point out that you can also use the “target date retirement funds” for goals other than retirement and they work just the same.
For example, if you plan to reite in 2040 and want to build that new house in 2025, then that 2025 target date retirement fund is an easy way to save for that new house while not risking too much of your capital so close to your goal date.
Just because it says “retirement fund” doesn’t limit it’s possibilities of use for reaching other goals.