How to Create an Asset Allocation Plan

Sponsors: The 31-Day Money Podcast is sponsored by Betterment and Personal Capital. Betterment and Personal Capital are two tools I use to make investing easier, less expensive, and more effective.

Topics Covered

• What is an asset allocation plan?
• What are the major asset classes?
• How are stock mutual funds classified (U.S. vs. foreign; large companies vs. Small; developed countries vs. emerging markets; value funds vs. growth funds).
• How are bond mutual funds classified (Government vs. corporate; short term vs. long; foreign vs. domestic; investment grade vs. high yield).
• Should commodities and real estate be part of a diversified portfolio?
• How much should you invest in stocks and how much in bonds?
• What factors should you consider in setting an appropriate stock/bond allocation?
• Should you have a foreign stock fund in your portfolio, and if so, how much?
• We look at some actual asset allocation plans, including the 3-Fund Portfolio.

Resources

• Intelligent Asset Allocator
• 4 Pillars of Investing
• All About Asset Allocation
• Three-fund Portfolio
• Lazy Portfolios
• Bogleheads Asset Allocation
• How To Roll Over a 401(k) Into an IRA
• Best Brokers for IRA Accounts
• Would You Give Up Cable TV to Retire Early?
• Vanguard Model Portfolio Allocations
• Retirement Plans FAQs regarding Substantially Equal Periodic Payments

Listener Questions & Comments

I cover the following questions and comments in today’s podcast:

MaryAnn: “I plan on retiring soon should I invest my 401(k) into an IRA? Are there any that you would recommend that are solid and honest?”

Art: “Rob, hey, I am really enjoying the podcast series, and appreciate all the time & effort you are putting into these. For the listener question about pulling from retirement accounts early, I was wondering about IRS Rule 72t and if that was applicable here? Thanks! Art.”

Kenneth: “Rob, DoughRoller is fast becoming one of my favorite Personal Finance websites. The site is very well organized and content is excellent. I found you by way of Podcasts. Keep up the good work.

My only remaining debt is a temporary HECL loan. I’m paying it down about $1,500/mo, and it’s at $58,000 right now. YNAB has my pre-YNAB HECL at $58,000, but my actual HECL balance is $50,128. That’s because YNAB has set aside category balances for my current spending categories, as well as annual categories such as property taxes and insurance. I keep my checking account balance right around $1,000, and have NO SAVINGS (other than the equity in my two homes, and my retirement account balances). The reason I’m laying this out, is I just listened to Podcast 20, the Debt Snowball. So I’m using my HECL as Springy Debt (a term MMM coined), and until I need the money to pay that insurance bill, it is used to pay down my HECL more than I actually could. Why keep $7,000 in Savings, when it could be lent at 4% to my HECL until the day I actually need it?”

Olivia: “I’ve been loosely following these podcasts and was chewing on your first speaker’s comment about $75,000 being a threshold for “financial independence”. As the average US household income is about $50,000, how can the rest of us even manage to retire at 70, let alone experience some measure of flexibility?”

Kevin: “I found your podcast through the MMM interview and have very much enjoyed the 31 day money series so far. I listened to day 13 this morning and could really relate to the debt snowball versus avalanche discussion. My wife and I read the Total Money Makeover about 3 years ago and will pay off the last student loan later this year. We started with Dave Ramsey’s approach of paying off the small debts first to celebrate a few wins. However, by the time the third small debt was paid off we were six months in and hitting a groove. At that point we decided to reorder the debts by interest rate and pay the higher rates first. This wasn’t quite as efficient as starting with the avalanche but this hybrid approach really worked for us.

Thanks for delivering a wonderful product and I look forward to the rest of the series.”

Day 19: How to Select Mutual Funds