What is Asset Allocation?

The first rule is that asset allocation is different for everyone; it’s largely dependent on your current financial situation and risk tolerance.

At Bradford Financial, we start by building your Allocation Model which is entirely based on your unique situation and goals. We’ll consider how much you have in your nest egg if you’re in good health, your life expectancy, your risk tolerance and more.

Asset Allocation Options

Asset allocation is simply an investment strategy meant to balance risk and reward by assigning a portfolio's assets based on an individual's goals, risk tolerance, and investment ceiling. It’s important to consider the options.

  1. Stocks
  2. Bonds
  3. Cash & Equivalents

Stocks

Generally, when you invest in stocks of regular operating companies, they shouldn't be more than 30% of your assets and should focus on high-quality companies Bradford recommends which are the stocks you hold on to for decades because they continually raise their dividend payments.

Consider these general “rules of thumb” when buying stocks based on this 30% allocation, blue-chip category:

  1. Don't pay more than 10 times cash earnings for operating companies.
  2. Don't pay more than book value for asset-based companies.
  3. Get at least 5% a year in dividends or share buybacks, on average.
  4. Avoid operating companies with weak profit margins (operating margins of less than 10%) and high debt loads.

Bonds as Fixed Income

Your situation, age, and current assets are all dependent on how much of your assets you should place as fixed income. Generally, if one placed at least 50% of their assets in fixed income, which should include 30%-40% in corporate bonds bought at a wide discount, the yield to maturity could be at least 10%.

The Other Sectors: Cash & Equivalents

It can be a good practice to have cash part of the asset allocation. Having some cash ready and available for opportunities in the markets to purchase new investments is a wise move.