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Asset Allocation Basics
Many Ways to Cut the Pie
Other experts might disagree about how to handle your real estate. We would reach a different conclusion about the percentage to invest in bonds if we excluded the real estate holdings from our asset allocation analysis.
A Second Approach
The second approach to your asset allocation question is to remove your real estate holdings from the equation and gauge the amount to invest in bonds based on your other investments only.
These investments total $700,000. Now, if we consider a portfolio with 20 percent invested in bonds, this would equate to approximately $140,000 compared to $320,000 with the real estate included. This would leave 80 percent, or $560,000, for equity investments. In my opinion, this may be too aggressive for most 68-year-olds unless you don't plan to use this money and reasonably expect a holding period of 7 to 10 years. Otherwise, consider investing 30 to 40 percent of your non-real estate investments in bonds.
Bottom Line
In my opinion, I think it makes better financial sense to consider all of your holdings in determining your proper asset allocation. This gives you a clearer and more precise picture of your risks and your sources for liquidation when you need money.
Clearly, if you intend to sell your real estate holdings to generate additional cash flow, you should plan for this illiquidity in advance. You must also determine from which investments your income will be received in the meantime, which could have an impact on the percentage you ultimately decide should be invested in bonds. As I said, this is not an exact science.
More Resources
See What Jeff Says About:
• The "Science" of Allocation
• back to intro
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