Asset Allocation

Asset allocation refers to the percentage of money you should put into each type of investment.  The asset allocation for your retirement account should be different than the asset allocation for your investment account because the assumption is you will not be needing the money in your retirement account for a long time (30+ years) but you may or may not need the money in your investment account in the next few years.

For your investment account, you should have an asset allocation that reflects your risk tolerance.  If you don’t know what your risk tolerance is, think about your gambling style.  Do you tend to play it safe (low-risk tolerance)?  Or are you a double or nothing kind of person (high-risk tolerance)?  There are also tests you can take to help you get an idea.  Even if you are a conservative investor, you should keep very little in cash/cash-equivalents unless you plan on making a big purchase soon.  Your emergency fund should be enough to cover any unexpected cash needs.

For your retirement account, you should have all or almost all of your investments in equities regardless of your risk tolerance.  This is assuming you’re a millennial and won’t be retiring soon.  Even though you could lose a lot of money in the short run with equities, your portfolio has plenty of time to bounce back.  And like I mentioned before, equities have unlimited potential for growth and will thus, protect you from inflation way better than bonds will.  But the closer you get to retirement, the less you should have in equities and the more you should have in bonds.


3 Main Types of Investments

The three main types of investments are equities, fixed-income and cash/cash-equivalents.

Stocks and mutual funds are two very popular examples of equities.  They’re what we’re most familiar with when we think of “investing” or “the stock market” (Apple stock, Google stock, Facebook stock, etc.).  When you invest in equities, your main goal is to make money through the growth of these stocks and/or mutual funds.  Even though there is an unlimited amount of money you could potentially make investing in equities, the trade off is it’s a bit of a gamble.  You could also lose most (or all) of your money too.

Fixed-income most often refer to bonds.  Bonds are basically when a government or corporation pays you interest for letting them borrow your money.  Bonds will give you a pretty predictable amount of income at regular intervals like 5% every 6 months.  The steady stream of income you get from bonds makes it a “safer” investment than equities.  But they will never grow like equities so don’t expect to get rich overnight from this type of investment.

Cash is pretty self-explanatory.  Cash-equivalents refer to investments that can be easily converted into cash without losing value (like bank CDs and T-bills).

Now that you know what the 3 most common types of asset classes are, next time we’ll cover how much money you should invest in each group.  The investment lingo for this is asset allocation.



Regardless of whether you’re investing in a retirement account or in an investment account, you should always diversify.  Diversification in its simplest terms means NOT putting all your eggs in one basket.  So putting all your money in Google’s stock…bad idea.

Here is an example of what is and what isn’t diversification:

Let’s say you have $100,000 to invest.  If you invest $50,000 in McDonald’s stock and $50,000 in Wendy’s stock.  That is not really diversifying even though you own 2 different stocks because both of them are fast-food companies.  If everyone decided to give up fast-food, both McDonald’s stock and Wendy’s stock would go down and your entire portfolio (account) would lose a lot of money.  You probably would’ve lost just as much money as someone who put all $100,000 in McDonald’s stock (i.e. “put all their eggs in one basket”).

But let’s say you put $50,000 in McDonald’s stock and then $50,000 in Target stock instead.  That would be considered diversifying because the two companies are not in the same industry.  If the fast food industry was going down, your portfolio will still lose money but not as much as someone who had all their money in McDonald’s and/or Wendy’s.

So as a rule of thumb, the less your stocks relate to one another, the more diversified you are.

First Step to Investing – Opening a Brokerage Account

Once you have a chunk of money saved that you won’t be needing for your expenses, emergency fund or retirement, you can open an investment account, which is also known as a brokerage account.  I use Charles Schwab because that’s what my company uses for all its employees and clients.

Instead of just using what I have, you should do some comparison shopping.  Comparing brokerage firms is kind of like comparing banks (Bank of America, Chase, Wells Fargo, etc.).  There are several factors to consider like minimums, fees and customer service.

NerdWallet does a great job of pinpointing what you should look for in a brokerage firm if this is your first time investing:

  • Commission-free mutual funds and ETFs with low expense ratios
  • Customer service (with access to brick and mortar branches)
  • Easy-to-use online interface
  • Low account minimums and no account inactivity fees

They ranked TD Ameritrade as best broker, especially for first-time investors.

I found a great comparison chart on The Motley Fool.  Just taking a quick look at the chart shows me that TD Ameritrade might in fact be the best option since it has lower minimum requirements than the other firms.

Once you select a firm, I recommend going to a physical branch and opening your account with a representative.  They will help you set up the account, transfer your money over and you can ask them any questions you have.

The next step in the investing process is selecting stocks and/or mutual funds to invest in, which I will cover in the next few posts.

General Financial Goals

My friend asked me, “what are general financial goals that adults in their mid-20’s should be focusing on, or does this depend on a case by case basis?”

Of course, everyone’s situation is different.  But here are three general financial goals that us young adults should be striving toward:

1. Building an Emergency Fund

If you lost your job today, how long would your emergency fund or savings account last you (assuming you don’t drastically change your lifestyle)?  Your goal should be to have enough money to last you 3-6 months!  You can reach that target amount pretty quickly by paying yourself first.

2. Saving for retirement

Although there is no “right” age to start saving for retirement, most finance experts agree that the earlier you start, the better.  How much should you be saving?  As much as you can!  There is no magic number to aspire to since everyone’s income and lifestyle is different.  If you don’t know where to begin, maxing out your 401k ($17,500 for 2013) or IRA ($5,500 for 2013) would be a good place to start.

3. Investing

This step should be taken only after you’re done building your emergency fund and you’re already saving for retirement regularly.  Investing is risky (you could always lose money!) so make sure you’re in good financial shape before taking this step.

I personally like investing in real estate.  I have an investment property that has been working out really well for me.  The rental income I get from my tenants covers my mortgage so I earn a little extra money each month.  Plus, the property has gone up in value so if I were to sell it, I’d have a nice profit.  But investing in real estate is all about timing (buying when houses are cheap and when interest rates are low).  Plus, it takes A LOT of work upfront – buying the property, fixing it up, finding tenants, etc.  So if it’s not the right time or if investing in real estate is not your cup of tea then the next best thing (in my opinion!) would be to open up an investment account and start investing in the stock market.  An investment account is kind of like a retirement account (IRA, 401k), except you don’t get any tax benefits.  The benefit you DO get is your money will probably grow a lot more and a lot faster than just keeping it in a savings account.

For those of you who are ready for this step, I will cover how to start investing soon.  So stay tuned.  In the meantime, here is an article that will help you get mentally prepared.


Here is a blog post that serves as a great supplement to this topic!

My Biggest Financial Mistakes

My biggest financial mistakes were made in college when I was 20 years old and regional governor of my sorority.  Being regional governor meant I was responsible for planning this huge banquet for 200+ guests.

The first mistake I made was I fronted the money to reserve the venue.  I had my heart set on a specific banquet room that I thought the girls would love but I was afraid it was too early to ask everyone to pay for their portion of the deposit.  Since I didn’t want to run the risk of losing the room, I used my own money to secure it, which cost me a couple thousand dollars.

Looking back and after talking to one of the former governors, I realized I should have never fronted the money and either paid the deposit after getting it from the girls or if I lost the room, to just find another one at a different hotel if necessary.  I’ll never forget the way she worded it, “I would’ve said ‘hey girls, we’re going to be having pretzels for dinner if you don’t give me that deposit.'”  Point being that having our event at a cheap venue would’ve still been a wiser decision than dipping into my own pocket.

The next mistake I made was selecting expensive party favors and again, fronting the money for it.  Every year the girls complain about how “lame” the party favors are at this event.  Since I was in charge that year, I wanted things to be different.  Better.  So my friend helped me find the perfect party favors.  The party favors we wanted were a little over budget and we had to buy way more than what we needed to keep the cost down.  I figured we could buy the bulk and use most of it for the event and then sell the rest to cover the price difference.  The girls ended up loving the party favors.  But when the party was over (literally), the girls were reluctant to sell the leftovers and they were unhappy about having to pay me back for them.  I was never able to get all of the money I fronted returned.

If I could do it all over again, I would’ve just gone with cheap party favors that were within our budget.  If people found them lame, oh well.  After a few days, no one really thinks about the party favors anymore.  But the issue of selling the remainders and trying to get my money back from the girls haunted me for the rest of my term as governor.

Last mistake I made was not getting the final negotiations with the hotel down in writing.  The hotel verbally agreed to give us the money made from the cash bar that night.  So after the event, I asked when we were going to get it and the event coordinator said, “I never agreed to that.”  When I pushed a little harder she said, “You know, we also never signed a new agreement for the discounted rate I gave you for the food.  So I can make this really ugly for you if you’d like.”  She was right, the final price per plate we agreed on was never put it writing.  So she could’ve easily said I owed her the original price we signed for, which would’ve cost us hundreds more.  Thankfully, she didn’t go that far but I still lost the hundreds we would’ve made from the cash bar.

The lesson I learned here was to have everything in writing, especially when it comes to dealing with money!

What about you?  What financial mistakes have you made?

When You Die Without A Will

A lot of us haven’t taken the time to create a will yet.  So what happens to all our assets when we die?

When we die without a will, it’s called dying intestate, which basically means the government has pre-decided how your assets will be split up.

If you are not married and don’t have kids – your assets will go to your parents.  If your parents are deceased, your assets will be shared equally by your siblings.  If you don’t have any surviving relatives, your assets will go to the state.

If you are married but don’t have kids, then 1 of 3 options will take place:

1)  your spouse will get everything

2)  your spouse will get a portion and your parents and siblings will get a portion

3)  your spouse gets all your personal property (car, furniture, etc.) but has to share real property (house, condo, etc.) with your parents and siblings

If you are married with kids – your spouse will get 1/3 while your kids share the remaining 2/3 equally.  If you only have one kid, then 1/2 goes to your spouse and 1/2 goes to your kid.

We should all have a valid will at some point but if you don’t like the way the government plans on splitting up your assets, you should probably get one sooner rather than later!