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Personal Financial Planning Series May 2011 FIU Employee Financial Literacy Program

Personal Financial Planning Series May 2011 FIU Employee Financial Literacy Program. Investing for Your L ife S tage Asset Allocation. The Life-Stage Approach. The Life-Stage Approach. the ability to tolerate risk lessens as retirement approaches How do you determine your risk tolerance?

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Personal Financial Planning Series May 2011 FIU Employee Financial Literacy Program

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  1. Personal Financial Planning Series May 2011FIU Employee Financial Literacy Program Investing for Your Life Stage Asset Allocation

  2. The Life-Stage Approach

  3. The Life-Stage Approach • the ability to tolerate risk lessens as retirement approaches • How do you determine your risk tolerance? • Insurance deductible • How much would you invest in an underwater salvage operation? • 100 – 54 (your age) = 46 (the percentage of your portfolio that should be in equity)??

  4. Places to go • www.investopedia.com • www.financialengines.com • www.vanguard.com

  5. Asset Allocation • “Modern” Portfolio Theory (Markowitz, 1952) • The Brinson Studies (1986) • Forces us to buy low and sell high!

  6. For example • $100,000 (20% large cap, 20% international, 20% small cap, 20% fixed income, 20% cash) • $20,000 in the large cap bucket • $20,000 in the international bucket • $20,000 in the small cap bucket • $20,000 in the fixed income bucket • $20,000 in the cash bucket

  7. The rebalancing! Our objectives have not changed, so we are still invested 20% each in 5 sectors. Six months later our portfolio looks like this: • $27,000 in the large cap bucket • $22,000 in the international bucket • $18,000 in the small cap bucket • $23,000 in the fixed income bucket • $20,500 in the cash bucket

  8. Our portfolio has grown to $110,500 or 10.5% in six months… • Your gut tells you to leave your money in the large cap fund, but asset allocation forces you to rebalance, so that each sector once again has 20%, which now is $22,100. • Remove $4,900 from the large cap bucket • Add $100 to the international bucket • Add $4,100 t0 the small cap bucket • Remove $900 from the fixed income bucket • Add $1,600 to the cash bucket

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