Asset Allocation

The first personal financial planning question you need to be able to answer is, “WHAT IS asset allocation? Well, it’s just a fancy term for your portfolio’s mix of stocks vs. bonds & cash. You’ll hear financial planning types talk about it a lot. That’s because your mix of stocks and bonds determines about 95% of the return that you end up getting. Your asset mix is a lot more important than the actual stocks, bonds, or mutual funds that you choose. So you’ve got to get this right! Asset allocation is an organized way of diversifying your portfolio.

Fortunately, asset allocation is about the easiest part of personal financial planning and investment management. By answering a series of questions about your situation and your tolerance for risk, you can fairly easily figure out what your asset allocation should be.

Go through the following questions, and have your spouse do the same if you are married, and figure out your final score at the end. If you are married, it’s important that you either both get your own score, or agree on an answer together for each question. Most couples will have one spouse who prefers a more conservative asset allocation, and the other more aggressive one. In this case, you will need to agree on an asset allocation that you can both live with, or manage your money separately.

Directions for completing the Asset Allocation Questionnaire:

1. Answer each question.
2. Write down the point value for each of your answers.
3. Add up your points from questions 1 & 2.
4. Add up your points from questions 3 – 12.
5. Subtract the points from questions 3 – 12 from the points from questions 1 & 2 to get your final score.
6. Compare your final score with the recommended asset allocation mixes at the end.

1. In approximately how many years do you plan to retire, or need to use this money?

In 4 to 6 years…………..52 pts.
In 7 to 10 years………….69 pts.
In 11 to 16 years………..70 pts.
More than 16 years……..71 pts.

2. Do you expect to withdraw or borrow one-third or more of this money from your account within seven years?
(for retirement income, purchase of a new home, college tuition, etc.)

No……………………….20 pts.
Yes, within 3 years……0 pts.
Yes, in 4 to 6 years…..12 pts.

Now add your points together from questions 1 and 2, and write them down.

Asset Allocation Planning Consideration: Under unforeseen circumstances, such as a loss of income, many people need to draw on “long-term” money for short-term needs. If you don’t have an emergency fund, a conservative investment approach may be the most appropriate.

3. Do you have an emergency fund (savings of at least three months’ after-tax income)?

No, I do not have an emergency fund…………………………….8 pts.
I have one, but it is less than 3 months of after-tax income….3 pts.
Yes, i have an adequate emergency fund………………………..0 pts.

4. Approximately what portion of your total investable assets does this amount of money represent?
(Investable assets include your emergency fund, 401K assets, bank accounts, CDs, mutual funds, annuities, cash value of life insurance, stocks, bonds, investment real estate, etc. They do not include your principal residence or vacation home.)

Less than 25%………………..0 pts.
Between 25% and 50%………1 pt.
Between 51% and 75%………2 pts.
More than 75%………………..4 pts.

Asset Allocation Planning Consideration: If you income is likely to change, you may have more or less money to meet your expenses. For example, during a period when money is tight, you may have to dip into your long-term investments. A more conservative approach may enable you to depend on money being available.

5. Which ONE of the following describes your expected earnings over the next five years?

(Inflation has been about 4.0% on average over the past 30 years)

I expect my earnings to increase and far outpace inflation (due to promotions, new job, etc.)………………………………………….0 pts.
I expect my earnings increases to stay somewhat ahead of inflation………………………………………………………………..1 pt.
I expect my earnings to keep pace with inflation………………..2 pts.
I expect my earnings to decrease (due to retirement, part-time work, economy, etc.)……………………………………………………….4 pts.

6. Choose the sentence below that best reflects your feelings about investment risk.

I want as much assurance as possible that the value of my investments will not go down……………………………………………………..7 pts.
I want to maintain a balanced savings mix with some fluctuation and growth…………………………………………………………………2 pts.
I want my money to grow as much as possible, regardless of risk or fluctuation…………………………………………………………….0 pts.

7a. Have you ever invested in individual bonds or a mutual fund or annuity that invests primarily in bonds? (Aside from U.S. Savings Bonds)

No, and I would be uncomfortable with the risk if I did………..10 pts.
No, but I would be comfortable with the risk if I did……………4 pts.
Yes, but I was uncomfortable with the risk……………………..6 pts.
Yes, and I felt comfortable with the risk…………………………0 pts.

7b. Have you ever invested in individual stocks or a mutual fund or annuity that invests primarily in stocks?

No, and I would be uncomfortable with the risk if I did………..8 pts.
No, but I would be comfortable with the risk if I did……………3 pts.
Yes, but I was uncomfortable with the risk……………………..5 pts.
Yes, and I felt comfortable with the risk…………………………0 pts.

Asset Allocation Planning Consideration: You may have responsibility for ongoing family obligations. This may suggest a more conservative approach.

8. How many dependents do you have? (include spouse, children you support, elderly parents, etc.)

None…………………………………………..0 pts.
One……………………………………………1 pt.
Two or three…………………………………2 pts.
More than three……………………………..4 pts.

Asset Allocation Planning Consideration: If a large portion of your income goes toward paying debt, you are more likely to need to have cash available to handle unforeseen circumstances.

9. Approximately what portion of your monthly income goes toward paying off debt other than a home mortgage? (auto loans, credit cards, etc.)

Less than 10%……………………………………0 pts.
Between 10% and 25%………………………….1 pt.
Between 25% and 50%………………………….2 pts.
More than 50%…………………………………..6 pts.

Asset Allocation Planning Consideration: Your comfort level with investment risk is important in determining how aggressively or conservatively you choose to invest. (Keep this in mind when responding to questions 10 and 11.)

10. Which ONE of the following statements describes your feeling toward choosing your retirement investment choices?

I would prefer investment options that have a low degree of risk associated with them (i.e., it is unlikely that my original investment will ever decline in value)……………………………………………………10 pts.
I prefer a mix of investment options that emphasizes those with a low degree of risk and includes a small portion of other choices that have a higher degree of risk but may yield greater returns………………….6 pts.
I prefer a balanced mix of investment options – some that have a low degree of risk and others that have a higher degree of risk but may yield greater returns……………………………………………………………3 pts.
I prefer a mix of investment options – some would have a low degree of risk, but the emphasis would be on investment options that have a higher degree of risk but may yield greater returns……………….1 pt.
I would select only investment options that have a higher degree of risk but a greater potential for higher returns……………………………..0 pts.

11. If you could increase your chances of improving your returns by taking more risk, would you…

Be willing to take a lot more risk with all your money?…………0 pts.
Be willing to take a lot more risk with some of your money?…..1 pt.
Be willing to take a little more risk with all your money?……….3 pts.
Be willing to take a little more risk with some of your money?…6 pts.
Be unlikely to take much more risk?………………………………10 pts.

12. What portion of your retirement income do you expect to come from these assets?

Less than 20%……………………………………….0 pts.
Between 20% and 34%……………………………..1 pt.
Between 35% and 50%……………………………..2 pts.
More than 50?………………………………………..4 pts.

Now add your points from questions 3 – 12 together. Subtract this number from your points from questions 1 & 2. This is your final score. Compare your final score to the target asset allocation, or asset mixes below.

If your final score is 70 or more: Aggressive growth target asset allocation.
70% Domestic Stocks
15% Foreign Stokcs
15% Bonds

If your final score is 50 – 69: Growth target asset allocation.
60% Domestic Stocks
10% Foreign Stokcs
25% Bonds
5% Short-term Investments

If your final score is 20 – 49: Balanced target asset allocation.
45% Domestic Stocks
5% Foreign Stokcs
40% Bonds
10% Short-term Investments (money markets, treasuries)

If your final score is less than 20 points: Conservative target asset allocation.
20% Domestic Stocks
50% Bonds
30% Short-term Investments (money markets, treasuries)