I agree with SkyDiving... I hold index and mutual funds in my largest account (my Roth IRA). I am fairly aggressive as far as asset allocation because I'm 26 and I have a long investment horizon, but my thinking is that I am not going to pick stocks better than investment professionals who are researching companies and trends full time so funds with low expense ratios are the way to go for me. I have a smaller, taxable investment account where I trade stocks but it is much smaller than my retirement accounts so I feel like I get any stock picking out of my system there, with low risk because it's not a huge amount of money.
Here is a question for SkyDiving and others: I just saw a CFP yesterday for the first time ever to make sure I'm headed in the right direction and have a good plan. He said my Schwab (IRA) account is more aggressive than he'd recommend, even if I am (hopefully) not going to need the money for a long time. He usually manages much larger accounts than what I have, but he said he recommends a 70/30 equity/FI mix. I was surprised at that and I figured I should be more aggressive than that since I'm young...
My current mix is 77% equity, 10% FI, and 13% cash (cash balance is not on purpose, it's basically waiting to be used). I was probably going to use the cash for more equities before I spoke to this guy.
Here's a more detailed allocation:
Large Cap Equity 43.7%
Small Cap Equity 14.2%
International Equity 18.7%
Fixed Income 10.3%
Cash Investments 13.1%
I was going to increase the large cap and small cap portions by about 5% each. What do you guys think about that... does it seem overly risky? I have/am building a cash emergency fund outside of this retirement account, so I don't really think I need to keep much of this account in cash. Thanks for any input... I was pretty surprised at the CFP's reaction so I'm interested to hear what others think.
My humble opinion/thought is that everybody's situation can be very unique, so it all depends on some of the other things that you have going on. For example, I spoke with a Cardiologist yesterday who's making close to $275K/yr. and has a stay-at-home wife/mom and three kids. He's 34, has a gigantic mortgage, had about $3K in his savings account and was maxing out his employer provided retirement plan and putting $1,000K/month into a taxable brokerage account with someone that was putting it all into American Funds C-shares.
He works for a State University and has a pretty shitty DI policy that isn't own-occupation, which had a cap of $3K/month of fully taxable benefits for 180 days and then a long term policy for 60% of his base earnings after 180 days which was also fully taxable. No Life policy outside of employer-provided 3X earnings, no will or guardianship provisions, no emergency cash savings, no health-care POA, no umbrella policy, etc...
So, in a nutshell, I didn't even bother focusing much on his investments without covering some other things first. I say all of that because I think there needs to be an efficient allocation of monies/capital to solve short, mid and long-term goals and issues while mitigating risks. All of that could be related to tax planning, estate planning, retirement, risk management, whatever... but I think a bird's eye view and careful analysis is required before you make any recommendations whatsoever.
However, if we're just talking about investments here, and without knowing much about your personal situation (for example, you could very well be thinking about buying a home at some point soon and not have enough cash to do it, but you could potentially look at taking up to $10K penalty free out of your IRA to solve that goal, so we would then need to re-allocate $10K to some pretty safe investments...) I think being 26 and having an 80%/85% and even 90% allocation to equities is just fine. I'll have that argument with most anyone, even though I know there are different camps out there that have legitimate reasons to think differently.
The big question then becomes, though, how do those 'equities' relate to one another? Also, funds and ETF's will have varying exposures to different areas even though it may still be considered to be an equity. For example, Schlumberger (a company, and stock that I love by the way) has a great deal of exposure to energy, oil, gas, materials, etc... but has a very low correlation to say, Verizon. Both are equities, though, right? But one very well may go up and the other may very well go down given varying economic circumstances.
So the key is having a low correlated portfolio of different types of equities, fixed income, commodities, other alternatives, cash, etc... and still have a 'risky enough' portfolio, but with enough diversification through non-correlation to mitigate systemic and non-systemic risks while still coming out in front of a 'very risky' or 100% allocation to pure equities, or 'very safe' or 100% allocation to fixed income and cash.
So yeah, finding a correlation coefficient of say .5-.6 and a Standard Deviation of say 10-12% and an upside capture ratio that's roughly 30%-50% (50% is pretty damn good) higher than the downside capture ratio, I'd say you're off and running. This is all based on the premise of long-term money, though. If I were making tactical decisions, I would have trailing sell stops on virtually every closed-end or intra-day traded position I had. Then I'd use the cash you had sitting on the sidelines and go long on VIX and buy some put options with the rest on a few very obvious equities or indices.
One fault of a CFP is playing everything by the book. I do not buy into the 70/30 equity/fixed income pie distribution at all. I think it all depends on the assets you're using that represent each class of investment:noidea:
