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As I’ve noted with our latest net worth update, my husband has his 401(k)contributions automatically deposited to receive his company’s match and I have a Roth IRA that I’m contributing towards. The year is winding down and we’re checking our finances to make sure we’re sticking with our goals.

I’ve been working on and adjusting my IRA’s asset allocation recently. My hope is to get closer to my target model.

Getting Started with an IRA

I’m grateful to a former boss for regularly encouraging his staff to plan for their retirement even though everyone was 30 years old or younger. I took his advice and I started setting aside money for retirement when I was 21. I would love to say that I continue contributing faithfully and have a huge balance, but I made a bad decision a few years ago. When I switched jobs, instead of rolling it over my IRA, I foolishly cashed it out.

I started again at another job and opened up an IRA. Later, I learned about the advantages of Roth IRAs, so I moved my money into one. Learning from that mistake, I’m been building up my retirement funds.

Importance of Asset Allocation

The gist of proper asset allocation is maximizing your return while minimizing your risk. While maximizing returns seems clear, risk is subjective. Everyone has their own risk tolerance, so you’ll see different investors choose different investment vehicles.

A benefit of having the proper asset allocation is to fit your goals. Usually investors seek aggressive growth in the long term and shift to more stability of their money in the short term (i.e. for people retiring soon).

My Personal Allocation Goal

I’m basing my plan on David Swensen‘s model. He’s probably best known for his track record as Yale University’s Chief Investment Officer. His book, Unconventional Success: A Fundamental Approach to Personal Investment, offers individual investors advice on what to invest in.

The general asset allocation he recommends includes:

  • Domestic Equity (30 percent)
  • Real Estate Investment Trusts (20 percent)
  • Foreign Developed Equity (15 percent)
  • U.S. Treasury Notes and Bonds (15 percent)
  • Emerging Market Equity (5 percent)
  • U.S. Treasury Inflation-Protection Securities (TIPS) (15 percent)

Note: JD from Get Rich Slowly found index funds and exchange traded funds (ETFs) that work with the model.
While I’m working on building it upon Swensen’s model, I’m leaning a bit more towards emerging market and a little less on REITs. I think it’s a better fit for my risk tolerance. His model isn’t the only one to consider. If you’re looking for more information on creating your portfolio plan, I recommend you check out The Intelligent Asset Allocator by William Bernstein.

If you’re curious about your current asset allocation, check out MorningStar’s X-Ray tool. It’s free to join and you’ll get a snapshot of your portfolio. If you have it already, you can also check with Quicken on your portfolio and get extra information on moving it towards your own goals.

Where to Open an IRA

Here are some places to consider for opening an IRA if you haven’t already started. The earlier you start, the more you can take advantage of compound interest.

  • E*TRADE (Annual fee and minimum are waived when you sign up for electronic statements)
  • Vanguard (Some funds require $3,000 minimum)
  • T. Rowe Price
  • Charles Schwab ($1,000 minimum is waived if you direct deposit $100/month)

I currently have my IRA at Sharebuilder and it’s worked fine for me. I have family that uses Vanguard and are extremely happy with them.

Right now E*TRADE is offering free trading for 60 days if you sign up with them.

Thoughts on Asset Allocation for Retirement

I’m not a financial professional, so if you’re looking for a professional trained to help with your finances and you live in the United States, try using The National Association of Personal Financial Advisors (NAPFA) to find a fee based financial planner.  They should be able to work with you and your individual financial situation.

If you’re handling your own investments, I’d love to hear your thoughts on the topic. How did you determine your asset allocation? What resources do you recommend on learning more? Are there any hurdles people should look out for when investing?

Photo Credit: epicharmus


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About Elle Martinez

Elle Martinez helps families at Couple Money achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth. Learn how to live on one income and have fun with the second..

24 comments comments closed

  1. Great summary! I recently posted about my asset allocation.

    In addition, I’ll be soon posting the specific funds I own with percentages in each and balancing between multiple 403b and IRA accounts.

    Like you said, each person’s asset allocation should be slightly different based upon:
    – risk tolerance
    – age and time line
    – amount already saved and overall net worth

    I have David Swensen’s book on my todo read list as I’ve heard good things about it.

    The premium version of Morningstar IMHO is worth it just for the Xray tool alone!

  2. @Investor Junkie: I’m amazed at how much asset allocation can affect your portfolio’s performance. Definitely check out Swensen’s book!

  3. Question: When opening an IRA through any of the companies you mentioned (vanguard, charles schwab, etc), what takes place? Do you click on a collection of investments and then start paying them? Very poorly worded question, I know…but how does one choose the appropriate IRA or Roth IRA? Do they give you a list of options or something?

    Matt

  4. @Matt: Good question, our experience has been easy with Vanguard and Sharebuilder. They walk you through opening an account. If you want to rollover your old job’s 401(k) into your IRA, they’ll take you through it.

    The good news is that these companies are happy to business with you and if neccessary will help you over the phone if it’s easier.