Allocations
All eggs in one basket is a metaphor that most investors employ to build a portfolio with different kinds of investments in their portfolio. Investors avoid placing all eggs in one basket. This discipline of holding different assets goes by the popular name diversification. Choice of assets depends on a large number of factors and it is a well known fact that holding uncorrelated assets weathers through down-cycles better than other non-diversified portfolios.
Equities, Fixed Income, Commodities, Foreign Exchange are different broad classes of assets. Within the Equity World, there are several other sub-classes, Value, Growth, SmallCap are well known groups. A fourth classification "momentum" has gained wide-spread following.
Vanguard Application is an excellent resource to experiment with. One can construct non-diversified portfolios and evolve them over different periods to see the impact of proper asset allocation.
Once you play with this tool, the importance of allocating some to fixed income securities will become very clear. So how to determine your allocation? So now let me get back to the main topic. These are not set in stone or one standard that would meet the needs of all. These are my considerations.
Don't forget Social Security -- which if exists will yield a constant payment. So everyone in the USA, who stands to receive Social Security, already has a fixed income allocation. How much AUM does that represent, is a key question. Let us consider someone who will receive 800 USD per month from Social security. This 800 per month income is roughly equal to 240000 USD. One can derive this amount with the calculation
Let us assume, our hypothetical friend, who expects to receive 800 from SSA, has 1 million in other savings.
Another common misconception people have about fixed income securities is regarding the inverse relationship between interest rate and the price of fixed income securities. That inverse relationship is a mathematical absolute. If the rate increases, price will go down and vice versa. Some of us try to time the market to determine the allocation. Please note that such mathematical apparatus will do most of us, DYI simpletons, no good. DYI investors should simply adopt
If your analysis dictates that you should increase your fixed income allocation, then do all the research, determine how much to buy and execute the BAHTM plan. Better yet, if the assets are held in a retirement account, consider zero coupon bonds, at a deep discount. Zeroes are NOT suitable in taxable accounts as you will end up paying tax for phantom income.
I avoid
All eggs in one basket is a metaphor that most investors employ to build a portfolio with different kinds of investments in their portfolio. Investors avoid placing all eggs in one basket. This discipline of holding different assets goes by the popular name diversification. Choice of assets depends on a large number of factors and it is a well known fact that holding uncorrelated assets weathers through down-cycles better than other non-diversified portfolios.
Equities, Fixed Income, Commodities, Foreign Exchange are different broad classes of assets. Within the Equity World, there are several other sub-classes, Value, Growth, SmallCap are well known groups. A fourth classification "momentum" has gained wide-spread following.
Vanguard Application is an excellent resource to experiment with. One can construct non-diversified portfolios and evolve them over different periods to see the impact of proper asset allocation.
Once you play with this tool, the importance of allocating some to fixed income securities will become very clear. So how to determine your allocation? So now let me get back to the main topic. These are not set in stone or one standard that would meet the needs of all. These are my considerations.
Don't forget Social Security -- which if exists will yield a constant payment. So everyone in the USA, who stands to receive Social Security, already has a fixed income allocation. How much AUM does that represent, is a key question. Let us consider someone who will receive 800 USD per month from Social security. This 800 per month income is roughly equal to 240000 USD. One can derive this amount with the calculation
social_security_monthly_payment * 12 * 25.
Let us assume, our hypothetical friend, who expects to receive 800 from SSA, has 1 million in other savings.
The 240000 is roughly equal to 19.355%, calculated as
240000/1240000.
Another common misconception people have about fixed income securities is regarding the inverse relationship between interest rate and the price of fixed income securities. That inverse relationship is a mathematical absolute. If the rate increases, price will go down and vice versa. Some of us try to time the market to determine the allocation. Please note that such mathematical apparatus will do most of us, DYI simpletons, no good. DYI investors should simply adopt
buy and hold to maturity BAHTM plan, when it comes to fixed income allocation. That relationship affects only those who buy and sell fixed income securities. Fixed Income securities is not designed for buying and selling and that activity is best left to quantitative traders working for the largest firms. We stand no chance.
If your analysis dictates that you should increase your fixed income allocation, then do all the research, determine how much to buy and execute the BAHTM plan. Better yet, if the assets are held in a retirement account, consider zero coupon bonds, at a deep discount. Zeroes are NOT suitable in taxable accounts as you will end up paying tax for phantom income.
I avoid
Annuitieslike a plague, in any of its incarnations. Any DIY investor can simply invest in basket instruments that generate solid and reliable income such PFF, SDIV, DVY.
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