generate bar code in vb.net Demystifying Asset Allocation in Software

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Demystifying Asset Allocation
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Fig 14-7 Time Horizon: Two-Times Factor Rule
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Years from Retirement 45 40 35 30 25 20 15 10
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Asset Allocation Strategy 90% 80% 70% 60% 50% 40% 30% 20% stocks, 10% stocks, 20% stocks, 30% stocks, 40% stocks, 50% stocks, 60% stocks, 70% stocks, 80% bonds bonds bonds bonds bonds bonds bonds bonds
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conservative when you get within 10 years of retirement So you may want to tweak the guidelines as you get older and consider holding a greater percentage of your assets in equities than this strategy calls for as you get within 20 years or so of your goal Moreover, it s important to customize your calculations based on your personal estimate of retirement don t just use the age of 65 as the target Many people retire well before or after that age Another approach is to combine risk tolerance with your general time horizon For example, say you have a long time horizon anything 10 years or more before you need to tap your money A reasonably aggressive person may decide that with more than 10 or 20 years, he or she can still a ord to put 80 percent in equities But a relatively conservative or moderate investor may believe that 60 percent is more like it With these sensibilities in mind, we can consider various model portfolios based on a combination of time horizon and risk tolerance (Again, these are only starting templates, and investors should consider their own speci c sensibilities and time horizons to arrive at a custom allocation) Figures 14-8 through 14-13 depict various allocation approaches for the three types we discussed above, as well as hybrid types
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A Mix and Match Approach
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Perhaps the most customary approach you can take to asset allocation is to gure out exactly what you re investing for and to match your approach with your goals, based on how far o each goal is What do we mean by this Sit down and write down all your investment goals They may include your children s college fund, your retirement fund,
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Fig 14-8
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PART 4 Organizing Your Assets
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Hypothetical Long-Term Conservative-Moderate Approach
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Fig 14-9
Long-Term Moderate-Aggressive Approach
Fig 14-10
Intermediate-Term Conservative-Moderate Mix
Fig 14-11
Intermediate-Term Moderate-Aggressive Mix
Demystifying Asset Allocation
Short-Term Conservative-Moderate Mix
Fig 14-12
Fig 14-13
Short-Term Moderate-Aggressive Mix
your dream vacation fund, or new house fund Then gure out exactly how much money you have in all your accounts, including your 401(k)s, IRAs, and taxable brokerage accounts Finally, see if you can put your money into the separate hypothetical buckets Since your 401(k) money is a retirement account that can t be tapped until age 59 , it should be counted in your retirement bucket Your college fund money, be it in a 529 savings plan or a regular account, should be in the college bucket And so on Next, write down how many years you are from needing the money Retirement is probably a long-term goal that s more than 10 years o But college may be only ve years away Your new house may be only three years away Your daughter s wedding maybe only a year away All of the money that s long term (more than 10 years o ) can be invested in stocks Your intermediate-term money (for goals that come due in ve to 10 years) can be invested in a mix of stocks and bonds, based on your risk tolerance Your short-term money (for goals due in three to ve years) can be invested in a mix of bonds and cash And your ultra-short-term money (for goals less than two years away) should probably be invested mostly in cash By doing this, you can reverse-engineer the perfect asset allocation strategy for you
PART 4 Organizing Your Assets
Rebalancing
An asset allocation strategy is not complete without a rebalancing strategy The term rebalancing simply means to reset, periodically, your mix of stocks, bonds, and cash The reason to do this is because, over time, the market will change your allocation for you unless you monitor it And often the market will take an appropriate allocation strategy and make it either too conservative or too aggressive within a few years For example, say you determine that a 50 percent stock/50 percent bond allocation is the best way to go So you invest half your $100,000 in a stock fund and the other half in a bond fund Now let s say that over the next ve years, the stock fund gains 10 percent annually, while the bond fund goes up just 3 percent Within ve years the $50,000 you staked in the stock fund would grow to $80,525, based on its 10 percent annual returns Meanwhile, the $50,000 you put into the bond fund would become around $58,000, based on a 3 percent annual return The upshot is, your $100,000 portfolio has grown to nearly $140,000 within ve years However, your asset allocation wouldn t be 50 percent stocks/ 50 percent bonds anymore It would be closer to 58 percent stocks and 42 percent bonds And that may be too risky for your situation You might ask: What s the harm in letting the market dictate your allocation After all, the example above shows the gains you would have earned had you let your winners ride The problem arises when trends in the market turn around Consider, for instance, that investors in the go-go 1990s did well by not rebalancing, as their stock portfolios grew ever larger But once the bubble burst, those investors got hit the hardest, since they entered the bear market of 2000 with dangerously high allocations to stocks T Rowe Price crunched some numbers and discovered that investors who had rebalanced periodically during the 1990s bull market and the bear market of 2000 would have done better than those who didn t rebalance since they would have booked pro ts and reduced risk along the way Consider the numbers in Figure 14-14 While investors who did not rebalance shined in the 1990s, when stocks were going straight up, they saw their advantage evaporate in the bear market, because so much of their money had been allocated to stocks The more disciplined investor who rebalanced surely lagged in the 90s But by taking pro ts incrementally along the way, these investors outperformed over the long run Conventional wisdom says that at the very least, investors ought to rebalance their mix of stocks, bonds, and cash back to their original plan once a
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