How to Allocate Investments

Welcome back, everyone, to We're Talking Money. Today what we're going to be talking about is asset allocation. So all of us at one point in time or another, whether it's 401ks, Roth IRAs, IRAs, we have some investment selection decisions to make. And what we hear all the time is, "I had some options, I wasn't really sure, so I checked the box. I think it's the right thing, but I don't really know." And so today we're going to give you everything you need to know so when you have these options, you can make the right decision.

You talk about one of the most important parts to building wealth, it has to be allocation. We're going to go through aggressive growth, moderate growth and then conservative. So aggressive, it's really defined as 70 percent to 100 percent of the portfolio will be aggressively invested into equities or the stock market. Now, one thing to note about aggressive allocation is it's going to look like this when you're looking at it in the short term, but long term an aggressive allocation is going to give you the best rate of return historically.

Problem is just saying, okay, I'll go with aggressive. There's a lot of factors that might help you decide aggressive isn't the right place, but too many people don't go aggressive enough. Know what to expect, so then when it starts going down you're not freaking out and selling out of everything, because that would be the worst thing that you could possibly do. If you're in retirement, getting close to retirement, maybe this isn't quite for you, but if you are young, you have a 10-year plus time horizon, aggressive probably will be the way to go.

What about moderate growth, though? Maybe that's the right answer for some people.

Sure. So moderate growth is defined as 50 to 70 of the portfolio being in equities or in the stock market. So certainly this one is going to be dialed down a little bit in terms of volatility, but also what you can expect is it's going to be dialed down a little bit in terms of return.

It's a really good planning opportunity for people is if you can, what we call the bucket strategy. If we have one bucket of money that we're not really investing, or maybe it's conservatively invested, then we can be more aggressive with this other pie, because we know that if this goes up, this goes down, it doesn't really matter, because we don't need the money in the short term. What we don't want to get into is where we have this money aggressively invested and then all of a sudden we need it for income. Well, now if the market goes down, we could be pulling out at a bad time. So you really want to be doing all the planning, and so moderate can be a good strategy for people getting close to retirement or in retirement. Do you want to touch on conservative?

Yeah, I think it's important to talk about conservative. On the other hand, I think sometimes people get into conservative allocations and they do it prematurely. In other words, they live like they're retiring tomorrow when they might have a horizon that's 20 years, 30 years. Why on earth would you be in a conservative strategy where you've just blocked the potential for really, really good performance, good returns that could lift your portfolio?

Conservative would be, say, 50 stocks, maybe 50 bonds. And in a lot of cases you might argue, well, that's a great portfolio, a great allocation, but it's all relative to what you're trying to accomplish, where you are in life. Don't pick an allocation because you think it sounds right, or because your neighbor's doing it, or you believe somehow that might make the most sense for you. There is a process that must be followed so that you get the right amount of equities, the right amount of bonds, alternative investments, metals, whatever it may be.

So when we talk about allocations, what inevitably comes up is, well, what's for me, or what's the best option? And I think one of the main points that I want to make in this entire show is that everyone's situation is so different. High level wealth management planning is extremely complex. And when you're getting advice on the internet, or this internet expert is telling you to do this, and this works every single time, and here's what you should do, generally that's probably not going to be the right advice, because you have to look at everything. Just like what Phil said, you're not just looking at one bucket of money, you're looking at, okay, what about all of your assets?

The major concept that you want to make sure you're aware of is diversification. You don't want to put everything in one sector, one stock, because now the sudden some news comes out and someone did this or someone did this, and all of a sudden your entire portfolio is hit. You want to be diversified and have not all your eggs in one basket. We still view that as a very important part to building and structuring portfolios.

So talking about our strategies, our strategy to build 20 to 40 stocks, and no stock is over five percent of the portfolio, so very, very diversified in terms of sectors, geographically, those types of things. What that allows us to do with clients' portfolios is we can, again, on the outside look like we're taking more risk, or at least get more of that return, while decreasing the amount of risk that you're taking.

So what does that look like long term? So here's the math here. I forgot my calculator, else I'd do it in front of you, but if you have a thousand dollars a month and you can save for 40 years and you can earn a 10 rate of return, so semi aggressive portfolio long term, you'll have 5.3 million dollars after that 40 years. But now let's assume that we don't take quite as much risk, so we don't get quite as much return, and we can still save the same thousand dollars a month for the same 40 years, but now instead of 10 we get 8 percent. Well, we've done this math before, but now that 5.3 goes to 3.1 million. So certainly nothing to hang your head on, still a lot of money, still a very successful retirement, but you left two million dollars on the table by not having your allocation dialed up to where it needs to be.

Don't be too conservative, but before you decide if you're being too conservative or too aggressive, know what you're trying to accomplish. Number one, work with someone who can help you sort through those details, who can help you better understand what you need to be successful. What does your true wealth look like? What is that going to take, and what's going to help you get there at the time that you would like to arrive at that destination? If you don't do those things, you're probably going to miss an opportunity.

Some great points, great show today. So thank you, everyone, for tuning in. Please like, share, subscribe, and we'll look forward to talking to you next time.

Thanks for joining us on We're Talking Money. If you'd like to learn more, check us out at omnistarfinancial.com. Subscribe to the show on YouTube, follow us on Instagram and Facebook. Tell us in the comments section what topics you'd like to hear in upcoming videos. If you enjoyed the show, give it a thumbs up and share it with friends.