Asset Allocation in Real Life

By Michael Gutter, Associate Professor, Interim FCS State Program Leader, and Family Economics Specialist, University of Florida

Photo Courtesy of DVIDSHUB https://creativecommons.org/licenses/by/2.0/legalcode
Photo Courtesy of DVIDSHUB

Marcus, 27, and his wife of five years Stephanie, 26, have a three year-old son, Alexander. Marcus is a proud member of the Army, his wife Stephanie is just thinking about going back to work now that their son has started going to daycare. They recently decided that they wanted to do a better job of managing their finances.

First, they met with a counselor who helped them to create and write down their goals. So they worked together to identify several SMART goals; that is, goals that are Specific, Measurable, Adaptable, Realistic and Time-bound. They came up with:

  • Payoff their $3,900 in credit card debt in the next 3 years.
  • They want to payoff Stephanie’s $16,000 in student loans in the next 10 years.
  • They want to be able to fund their son’s college education in 15 years, for four years, assuming $12,000 per year in today’s dollars.
  • They want to be able to retire in 34 years and afford a similar lifestyle to what they have now.

Their counselor worked them on a debt repayment plan and budget. They were able to determine how much money they could afford to save for their last two goals.

For Alexander’s education savings, they chose their state’s 529 plan, which happened to be Florida. The Florida state 529 plan allows for 11 different investment choices. This was a bit overwhelming for Marcus and Stephanie who have very little background in investing. Their first thought was to take little or no risk. However, when they looked at this option, and used the online estimator, they found they would not be able to save as much money as needed to reach their goal for Alexander’s education.

They asked some questions and learned about the relationship between risk and return. They also learned how the amount of ups and downs differed between different types of investment assets. Stocks had a higher return in the long run but had a lot more ups and downs. On average, the risks and returns tend to work out over time, with stocks doing well for long-term goals that are more than a decade away, but bonds were more stable in the intermediate terms. Short-term goals, within the next year or so, would require cash and fixed income. So different time frames required different weighting for each of those areas; stocks, bonds, and cash. They settled on a mutual fund whose allocation to these asset types changed over time as the child aged; it was timed to his high school graduation year.

This same information was helpful as they looked into Marcus’ Thrift Savings Plan that he was eligible for, Marcus is a Sergeant in the Army. He looked at the different fund options. They also looked at the Lifecycle Funds.

What would you pick if you were Marcus?

Stephanie decided to open an account herself. She went with a Roth IRA. She had to build her asset allocation in this account, too. Using the same concepts, she learned about screening mutual funds from the MFLN webinar on Asset Allocation. She was able to find a mix of funds that gave her a lot of growth potential over the decades she still had until retirement.

Asset allocation can make a difference in how much we need to save to reach our goals. Asset allocation can also be a tool to diversify or manage the risk of the portfolio. It is an important decision most of us will face as we seek to save for our goals! For more information on asset allocation in personal portfolios, check out a recorded web conference by the Military Family Learning Network Team.

This post was published on the Military Families Learning Network blog on February 16, 2015.