The Smooth Sailor: Your Asset Allocation
LV Critical Lesson: This is an ideal asset allocation for someone who is in her 40s and saving for retirement or someone who is saving for another goal that is 10 to 15 years away.
RED FLAG: Your situation should be in the same ballpark as the above ideal. If it’s not, consider retaking the LV Investing Goals & Risk Tolerance Quiz. Remember, a certain amount of risk is necessary to reach your goals.
With this asset allocation, if you have $5,000 to invest, it would break out the following way (we’ll cover this more in Day 11 of Investing Bootcamp):
Large Cap stocks include very large American companies like Apple and General Electric.
Small/Mid Cap stocks include smaller American companies, like Chipotle or Revlon. You may see some big swings in funds that invest in small/mid cap companies, but you should also see higher returns over time.
International stock includes non-American companies of all sizes (small-, mid- or large-cap). That can mean a company in a developed country like Germany (Volkswagen) or a company in a country whose economy is still emerging, like Korea (Samsung). International investments can be risky for many reasons, but having some in your portfolio is a great way to protect against risk with American companies. It adds to your diversification!
Bonds are generally safer investments, but offer lower returns as a result. Instead of buying a part of a company in the form of stocks, these funds lend money to the company in return for interest payments.
Cash in an investment portfolio is just another way to diversify against risk.