WHEN IT COMES TO INVESTING FOR YOUR FUTURE, THERE'S ONLY ONE SURE BET―ASSET ALLOCATION THE EASY WAY TO GET STARTED Everything You Need to Know About How To: Implement a smart asset allocation strategy - Diversify your investments with stocks, bonds,real estate, and other classes - Change your allocation and lock in gains Trying to outwit the market is a bad gamble. If you're serious about investing for the long run, you have to take a no-nonsense, businesslike approach to your portfolio. In addition to covering all the basics, this new edition of All About Asset Allocation includes timely advice on: Learning which investments work well together and why - Selecting the right mutual funds and ETFs - Creating an asset allocation that’s right for your needs - Knowing how and when to change an allocation - Understanding target-date mutual funds "All About Asset Allocation offers advice that is both prudent and practical--keep it simple, diversify, and, above all, keep your expenses low--from an author who both knows how vital asset allocation is to investment success and, most important, works with real people." -- John C. Bogle, founder and former CEO, The Vanguard Group "With All About Asset Allocation at your side, you'll be executing a sound investment plan, using the best materials and wearing the best safety rope that money can buy." -- William Bernstein, founder and author, The Intelligent Asset Allocator Richard A. Ferri, CFA, is president and senior portfolio manager of Portfolio Solutions, LLC, and an adjunct professor of finance at Walsh College in Michigan. He is the author of Protecting Your Wealth in Good Times and Bad, All About Index Funds, and Serious Money: Straight Talk About Investing for Retirement. Ferri is regularly quoted in the media including the Wall Street Journal, Barrons, Businessweek, and Forbes. He has appeared on many financial radio shows and television programs and is a frequent speaker at advisor industry events. Richard A. Ferri, CFA, is president and senior portfolio manager of Portfolio Solutions, LLC, and an adjunct professor of finance at Walsh College in Michigan. He is the author of Protecting Your Wealth in Good Times and Bad, All About Index Funds, and Serious Money: Straight Talk About Investing for Retirement. Ferri is regularly quoted in the media including the Wall Street Journal, Barrons, Businessweek, and Forbes. He has appeared on many financial radio shows and television programs and is a frequent speaker at advisor industry events. All About ASSET ALLOCATION By RICHARD A. FERRI McGraw-Hill Copyright © 2010 The McGraw-Hill Companies, Inc. All right reserved. ISBN: 978-0-07-170078-8 Contents Chapter One Planning for Investment Success KEY CONCEPTS • Investment planning is critical to long-term success. • Asset allocation is the key element of investment planning. • Discipline and commitment to a strategy are needed. • There are no shortcuts to achieving financial security. A successful lifelong investment experience hinges on three critical steps: the development of a prudent investment plan, the full implementation of that plan, and the discipline to maintain the plan in good times and bad. If you create a good plan and follow it, your probability of financial freedom increases exponentially. An investment plan provides the road map to fair and equitable investment results over the long term. Your asset allocation decision is the most important step in investment planning. This is the amount of money you commit to each of various asset classes, such as stocks, bonds, real estate, and cash. It is your asset allocation that largely determines the growth path of your money and level of portfolio risk in the long run. Exactly how you invest in each of these asset classes is of lesser importance than owning the asset classes themselves, although some ways are better and less expensive than others. What is you current investment policy? Consider the following two portfolio management strategies. Which one best describes you today? • Plan A. Buy investments that I expect will perform well over the next few years. If an investment performs poorly or the prospects change, switch to another investment or go to cash and wait for a better opportunity. • Plan B. Buy and hold different types of investments in a diversified portfolio regardless of their near-term prospects. If an investment performs poorly, buy more of that investment to put my portfolio back in balance. If you are like most investors, Plan A looks familiar. People tend to put their money into investments that they believe will lead to profitable results in the near term and sell those that do not perform. The goal of Plan A is to "do well," which is not a quantifiable financial goal. What does "do well" mean? Plan A provides no guidelines for what to buy or when to buy it, or when to sell because of poor performance or changing prospe