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End of the Year - Asset Allocation

© Kirk Lindstrom

This is the final month of another wonderful year to be fully invested in the US stock market. The S&P500 is up 32.8% as of Dec. 8th 1997, the DOW is up 26.4% and the NASDAQ is up 26.6%. While most mutual funds did not beat the S&P500 in total return, most reasonable funds are up between 20 and 35% just this year. My personal portfolio contains some international stock mutual funds which have seen a bit lower total return but I still managed to gain about 25% TOTAL RETURN for this year. IF you were 100% invested in the stock market this year and didn't do at least 20%, then it is time you asked some good questions of yourself starting with "Why?"

From my personal conversations to other investors on the internet as well as in real time, face-to-face conversations, I know that there are many investors that lost money this year or had returns far under 20%. This is a true shame in one of the greatest investment markets in history. Major mistakes I see investors making fall into several categories. The biggest obstacles I see to good investment returns are "asset allocation", greed, high sales loads and a lack of knowledge about "Value". All of these subjects are worthy of many articles. I'll start with the first and write about the others later.

Having a good asset allocation is the best way to insure reasonable investment return year after year. Aggressive investors under 40 years old can have all their money in the stock market while someone retired should be half in the stock market and the other half in fixed income investments. For the equity portion of your portfolio, you want to be invested in stocks that are representative of the whole stock market. I like having 75 to 90% of my equity portfolio in the US stock market since it is the best and then have the remainder diversified around the world. You can get your US allocation via a single mutual fund, a few funds or many funds, but all methods should strive to be about 70% in S&P500, 20% in Midcap and 10% in small cap stocks or stock mutual funds. Your foreign portion of your portfolio should be in a good, international fund at a minimum and more money can be in European and Emerging Markets funds. All of these funds should be no-loads and should have above average returns for their fund objectives for the past year and 3 year periods. Feel free to substitute GREAT stocks bought at LOW valuations for up to 50% of your US mutual funds, just make sure no stock is more than 4% of total equity on a cost basis. I usually only use 1% so if it tanks, I only lose a small fraction of my total net worth.

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