Your home is a special place. It provides you with safety, shelter, comfort, and enjoyment. It's tailored to your specific needs, wants, and desires. It's a reflection of your taste and your personality. Your asset allocation plan—or your "financial house"—is just as special and reflective.
Before you build a home, decide exactly what you want. We have all seen people leaf through magazines and point out fantastic kitchen or home theater equipment. They may even go so far as to tear the page out and save it for future reference. They are deciding what they want. It's just as imperative with asset allocation.
[See 3 Rules for Positive Returns in 2011.]
People looking to build a house all have ideas about what they will need, want, and accept. Each part of a house has a different purpose. The kitchen is for cooking, the bedroom is for sleeping, the basement is for storage, and the dining room is for eating.
Separate your investments in the same way. Decide what you want before you buy, or build with your asset allocation just like you would with a home. Build what meets your needs.
It's important to realize that some areas of a home may be more exciting than others. I'll admire a great home theater way before I'll admire a great dining room. I'll spend way more time talking about home theater gear than I will about kitchen appliances. That doesn't mean I'd move into a house without a refrigerator.
It's the same with asset allocation. Stocks may be fun to talk about—just ask anyone who watches Mad Money—but the other components of the portfolio, like fixed income and cash, which are not as exciting, are still very important. Don't fall prey to only concentrating on the fun parts. You'll end up with an uncoordinated home in which all the rooms are disjointed.
Finally, know what you want your asset allocation to do in the same way you know how you'll use your home. A couple with no kids who want to entertain will want a very different floor plan than a couple with children who just want to maximize the number of bedrooms available.
Next, settle on the blueprint. Then work on the blueprint … the plan you'll follow. You have one right? The blueprint should be your two-dimensional overview of the layout of the house. It should reflect your different needs and desires. Different people have different needs for their homes and a plan that is right for one family may not be right for another.
For instance, I have a two-level home with the bedrooms on the second floor. My parents have a two-level home but the master bedroom is on the first floor. Their first-floor bedroom keeps them from having to use the stairs. Great feature ... for them. Asset allocation is a lot like that. Although an individual investment may be a good idea on paper, it may not fit your specific needs and desires. Additionally, you may walk into someone else's home and see something interesting in their floor plan. But that does not mean you should change your house to incorporate it.
Take the time to create a plan. The plan should outline all the needs and desires that will allow you to live in the home until you outgrow it.
Next week, we will address "construction" and "decorating" your financial house, and discuss why it's always best to build the walls and frame first to provide the proper protection before tackling the interior. You'll end up with a mess if you do it the other way around.
David B. Armstrong CFA, is a Managing Director and co-founder of Monument Wealth Management in Alexandria, VA, a full-service financial planning and wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America's Top 100 Financial Advisors for two straight years by Registered Rep magazine (2009 & 2010) based on assets under management and has been interviewed by several national media sources for the past several years. David and Monument Wealth Management can be followed on their blog at "Off The Wall" their Twitter account @MonumentWealth, and on their Facebook page.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Asset allocation does not ensure a profit or protect against a loss.
Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.
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