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Module 11 Asset Allocation

Module 11 Asset Allocation. Module 11 Learning Objectives. Define asset allocation. List the asset classes and subcategories an investor can select from. Explain how asset allocation can maximize return and reduce risk. Explain rebalancing. Evaluate the asset allocation of a portfolio.

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Module 11 Asset Allocation

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  1. Module 11Asset Allocation

  2. Module 11 Learning Objectives • Define asset allocation. • List the asset classes and subcategories an investor can select from. • Explain how asset allocation can maximize return and reduce risk. • Explain rebalancing. • Evaluate the asset allocation of a portfolio.

  3. Asset AllocationTrue or false? • Most investors hold a well-diversified portfolio. • Humans were meant to stock pick. • Investing will always be partly a guessing game.

  4. Name all the asset categories you can allocate into.

  5. Consider the full menu of investments

  6. Let’s work on the best return first

  7. Does more return mean more risk?

  8. Does the risk double with two investments? The key is having two investments which aren’t correlated.

  9. Adding a riskier investment to your portfolio decreases overall risk.

  10. If you allocate the right amount you reduce risk and increase return!

  11. Some investors think of risk as the maximum loss they are willing to take. What does asset allocation do for that?

  12. You can reduce your maximum loss by diversifying.

  13. Life Cycle Asset Allocation

  14. Combining risk and return to get the most efficient portfolio.

  15. Bonds – Risk Return

  16. US Stocks – Risk Return

  17. Sectors – Risk Return

  18. International – Risk Return

  19. Combined – Risk Return

  20. Calpers is the California pension system. Check out their 2007 to 2008 target asset allocation (available on their Web site www.calpers.ca.gov under Investments). What differences do you see? What does their target allocation suggest?

  21. Pension Fund Portfolio 21

  22. “Millionaires” Portfolio 22

  23. David Swensen suggests a portfolio 23

  24. Rebalancing Adjusting portfolio based on asset allocation goals

  25. Buy high, sell low

  26. Rebalancing • Determine what your asset allocation will be. For example: • 60% stocks • 40% bonds • Adjust your portfolio when your allocation exceeds 5% difference from your target so that you keep your asset allocation goals, that is 60% stocks and 40% bonds

  27. No rebalancing • If you didn’t rebalance your portfolio, the allocation of stocks would grow to 73% and the allocation of bonds would shrink to 27%

  28. Rebalancing • Rebalancing naturally sells high and buys low • You end up with more gains • It reduces the lows.

  29. Protect your wealth.

  30. Safeguard all your financial information • Keep good records and reconcile all your accounts • Check your credit report • If you feel that you have been a victim of fraud, file a complaint with the DFI at 1-877-RING-DFI or at their website www.dfi.wa.gov.

  31. Take time to pick an investment advisor who is appropriate for you. Look at Certified Financial Planner website for tips on how: http://www.cfp.net/ • Immunize yourself against investment fraud – check out all advisors and investments – google them and check with www.dfi.wa.gov

  32. Let Uncle Sam help you save (taxes).

  33. Use tax-advantaged saving Check www.irs.gov Publication 590 for more information.

  34. Tax-advantaged education saving • 529 Plans – after-tax contributions, tax exempt distributions if used for qualified educational expenses • College savings plan • Prepaid college tuition plan (Washington GET www.get.wa.gov) • Coverdell – after-tax contributions, tax exempt distributions. Some restrictions.

  35. Six steps to investing intelligently • Set goals and develop a life-long saving plan.  • Learn about returns and risk. • Evaluate your investments. • Asset allocate. • Protect your wealth. • Use tax-advantaged saving.

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