Your first step in portfolio allocation should be to decide how much of your money should be in stocks.Most financial planners use a rather simple formula.They simply subtract your current age from 110.That figure will give the financial planner a rough estimate of how much of your funds should be in the stock market.The specific percentage will be based on your individual risk tolerance.Your risk tolerance basically is the amount of risk you are willing to take with your money and still be able to sleep at night.Financial planners will ascertain this by asking you a list of various questions regarding your finances.The remaining funds not allocated to the stock market will be allocated to other asset classes.Examples would include money market funds,fixed income instruments such as bonds and certificates of deposit,and alternative assets such as real estate and commodities.
The next step would be to then allocate the stock portion of your funds among the stock categories.An investor should try to cast as wide a net as possible.Over time,diversification has proved to be a valuable tool as at different phases of the economic cycle different stock sectors fall in and out of favor.Your portfolio should contain both broad types of stocks,growth stocks and value stocks.
Growth stocks are stocks of companies whose prospects for the future look bright and therefore whose earnings which rise rapidly.Stock prices inevitably follow a company's earnings over the long term.Some examples of these types of stocks would be technology and biotechnology companies.
Value stocks are stocks of companies who are growing more slowly,but also steadier.Their valuations are much lower than for growth stocks.Famed investor Warren Buffet is a buyer of these types of stocks.Some examples of these types of stocks would be infrastructure stocks such as utilities and consumer stocks such as Nestle's.
Your stock portfolio should be broken down further into both US and international stocks.The total market capitalization of the US stock market has fallen to 45%,less than half of the market capitalization of the other global stock markets.The biggest mistake that some financial planners make is not placing enough of a person's assets into international stocks.This was not as important in the past but it is in today's global economy.There is rapid industrialization happening in many parts of the the globe.There are literally billions of people rapidly climbing up the economic scale.Rapid economic growth means rapid earnings growth for companies which inevitably means rapid growth in the stock prices of those companies.It would not be a wise choice to ignore the rest of the globe and keep your money solely in the US.
If you follow these simple basics as part of your overall financial plan,meeting your long term financial goals should be within your grasp.