If you've already got money set aside for different uses then you're already halfway there. We're not asking you to start all over. Instead, you should use those investments as the building blocks for your portfolio.
Say, for instance, you've visited our College Planning department and it tells you to save $200 a month, invested 75% in high-volatility funds and 25% in medium-volatility funds. Then you go through this section's worksheet and it tells you that you should be 50% in large-company stocks, 30% in small-company stocks, 10% in bonds and 10% in cash.
What now? You simply fit the funds you've already chosen for college into the asset-allocation model. Say you chose a medium-volatility large-cap fund from our list of preferred funds. Go ahead and count that as part of your 50% allocation in large-company stocks. If you chose a high-volatility small-cap fund, you can do the same thing with that. Your retirement investments — be they in a 401(k) or IRA — should be folded in the same way. This can sometimes be tricky because of all the rules surrounding retirement accounts. See How Should You Invest? in the Retirement section for tips on how to make it easier.
Short-Term Investments
This allocation system is designed for your longer-term investments. Money already earmarked for short-term goals shouldn't be included — savings for a down payment on a new house, for instance, or your tuition fund if college is just a few years away. Because you have no time to make up a short-term downturn in the stock market, those kinds of savings demand a more conservative approach. We address your short-term college savings goals in the last two Guerrilla Funk College Portfolios. For everything else of a near-term nature, visit our Short-Term Investing department.
Make It a Yearly Habit
Asset allocation is easy — something anybody who is busy will appreciate. But since uneven price movements in your investments can upset the balance over time, it's best to rebalance each year. This has the added benefit of lending a vital measure of discipline to your investing. It prods you to take the appropriate amount of risk when you're feeling overly cautious. It reins you in during those times when the sky seems to be the limit.
Say, for instance, you do the worksheet and your ideal allocation calls for 10% cash, 15% bonds and 75% stocks — with the stock portion split three ways between large-company, small-company and international equities. As the year progresses, your large-cap stocks fall for a 20% loss, but your small caps gain and everything else stays about the same. At the end of the year, you'd have a choice of ways to restore the balance. You could use new money to buy more large-company stocks on the cheap, as well as a new portion of bonds and cash. Or you could sell some of the more expensive small-company winners. Buy low, sell high. It's fundamental to sound investing.
