Assets allocation

Assets allocation - Announcements Investing Asset...

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Investing: Asset Allocation ARE 142: Personal Finance Professor Heather Rose UC Davis, Fall 2009 Lecture 14 1 Announcements Credit card grades are up Income statement due on Thursday Practice problems available with solutions 2 Overview of Savings/Investments Investment Vehicles – accounts where you put your money Regular investment account 401K IRA (Roth and Traditional) Plans for self-employed (SEP, Simple, Solo-401K) Investment Assets – what you buy with those accounts Stocks Bonds Mutual Funds Historic returns Best mix of those assets How much you want to save Financial plan Inflation Social Security benefits How much do you expect to spend 3 Investment Assets Cash (checking, savings) Rates: 1.3% at ING direct Liquid, good for short term (money you’ll need within 3-5 years) Unlikely to keep up with inflation Good for money you Bonds Higher returns than cash Not too risky (treasuries) Fixed returns susceptible to inflation risk Stocks Highest returns Volatile in short run, less so in long-run Higher returns go hand in hand with higher risk 4
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Returns Vary By Horizon and Term What’s Better: Stocks or Bonds? You tolerate more risk when you are young Optimal assets changes over time Even when young good to have a mix of Even when young, good to have a mix of assets. A mix can reduce large swings in your returns. 7 Example: You Can Tolerate More Risk When You are Young You are 25 and want 1.5 million by the time your are 65. Expect 8% return in stock market. How much do you need to save per year (starting at end of this year and save for 40 years)?
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