International Financing and International Financial Markets FIU – International Finance Session 12.
Personal Financial Planning Series May 2011 FIU Employee Financial Literacy Program
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Transcript of Personal Financial Planning Series May 2011 FIU Employee Financial Literacy Program
Personal Financial Planning Series May 2011
Investing for Your Life StageAsset Allocation
Personal Financial Planning Series May 2011FIU Employee Financial Literacy Program
The Life-Stage Approach
The Life-Stage Approach the ability to tolerate risk lessens as retirement approachesHow do you determine your risk tolerance?Insurance deductibleHow much would you invest in an underwater salvage operation?100 54 (your age) = 46 (the percentage of your portfolio that should be in equity)??
Places to gowww.investopedia.comwww.financialengines.comwww.vanguard.com
Asset AllocationModern Portfolio Theory (Markowitz, 1952)The Brinson Studies (1986)Forces us to buy low and sell high!
For example$100,000 (20% large cap, 20% international, 20% small cap, 20% fixed income, 20% cash)$20,000 in the large cap bucket$20,000 in the international bucket$20,000 in the small cap bucket$20,000 in the fixed income bucket$20,000 in the cash bucket
The rebalancing!Our objectives have not changed, so we are still invested 20% each in 5 sectors.Six months later our portfolio looks like this:$27,000 in the large cap bucket$22,000 in the international bucket$18,000 in the small cap bucket$23,000 in the fixed income bucket$20,500 in the cash bucket
Our portfolio has grown to $110,500 or 10.5% in six months
Your gut tells you to leave your money in the large cap fund, but asset allocation forces you to rebalance, so that each sector once again has 20%, which now is $22,100.Remove $4,900 from the large cap bucketAdd $100 to the international bucketAdd $4,100 t0 the small cap bucketRemove $900 from the fixed income bucketAdd $1,600 to the cash bucket