On multiple occasions, I’ve mentioned the financial services industry’s incredible ability to confuse everyone – seriously, everyone. My goal is to help make a little bit of sense out of the mumbo jumbo in hopes that it helps people make better decisions. In previous series, we discussed basic investing and financial planning.
We recently started an asset allocation series to build up the foundation of your financial literacy house. In Part One of the series, we discussed what asset allocation is and why it’s important, and provided an overview of some common asset allocation strategies (one of which was not a get-rich-quick scheme). Today we will do a deeper dive into each of the four most common asset allocation strategies: strategic, dynamic, tactical, and core-satellite.
Strategic Asset Allocation
Strategic asset allocation (SAA) is a long-term approach that is designed to minimize the impact of emotions on portfolios. The goal is to create an appropriate mix of investments that balance risk and long-term returns.
The concept suggests that investors will benefit by staying invested in the markets and adhering to target allocations that reflect characteristics of the investor, rather than the performance of specific investments.
When the market is volatile, are you a Snoopy Joe Cool type, or are you more of a doom and gloom Charlie Brown type? Target allocation percentages for various asset classes (e.g. bonds, U.S. stocks, international stocks…) are selected based on the investor’s comfort level with risk, time horizon, and investment objectives. As those items change, the allocations may change, as well. The portfolio allocations are monitored periodically. Then, as the allocation percentages drift from the targets – as the markets go up and down – the allocations are rebalanced back to the risk aligned target percentages. It’s a more passive strategy that doesn’t change based on economic conditions.
Dynamic Asset Allocation
Dynamic asset allocation (DAA) is similar to strategic asset allocation in that both set target allocation percentages of asset classes. However, dynamic allocations may have several short-term adjustments to those allocations based on current and expected market and economic conditions. When using DAA, the focus is typically on the absolute return, not on comparing to an index/benchmark. Investors and managers who use dynamic asset allocation can achieve high returns if they are right regarding their assumptions on what the market will do. Obviously that is easier said than done, especially in flat and down markets. Pay attention to trading costs if you (or your advisor) use DAA, as it can get expensive.
Tactical Asset Allocation
Tactical asset allocation (TAA) is a more active approach. It involves constantly evaluating specific investments, looking for opportunities to take advantage of undervalued or overvalued assets. Those who use this strategy are typically looking for shorter-term gains from market inefficiencies where the market overreacted to something, though the investments could be held longer.
TAA proponents essentially act as appraisers, using fundamental and technical analysis of the investment, markets, and economic conditions to evaluate the value of an investment. If it appears to be undervalued, they buy it. If it appears to be overvalued, they sell it. Use caution here – if you’re investing outside of a retirement account, you should be aware of the tax implications of the shorter-term gains. Most people who use TAA have significant investing experience, as well as access to a lot of economic data.
Core-Satellite Asset Allocation
Core-satellite asset allocation involves launching a satellite into space that will manage your money while simultaneously strengthening your core…
Ok, not true, but it would be epic if it were! One part Elon Musk, one part Warren Buffet, one part Arnold (I won’t even attempt to spell his last name). Shaken, not stirred. Epic, I say – epic! But I digress… again.
Core-satellite asset allocation is a hybrid approach. There is a fundamental core to your portfolio, which serves as the foundation. The core portion will be more long-term strategic asset allocation (potentially dynamic asset allocation) tied to your individual risk tolerance. The satellite portion of the portfolio will consist of shorter-term, more tactical allocations. The more seasoned the investor, the more she may lean towards a larger satellite allocation. The more novice investor should probably lean towards a larger core allocation.
Hopefully now you have a basic understanding of asset allocation. There are a lot of different strategies out there, and picking the right one for you comes down to your personality, how involved you want to be, and a good advisor guiding you.
As originally posted at http://centsai.com/investing-experts/asset-allocation-101-part-2-common-strategies/
Ok. I'm far from Captain America. But being a Marine, then a veteran, then an entrepreneur is sort of the dream, right?
I’ve always been drawn towards challenges. One day after high school I woke up and decided to look for the biggest challenge I could find. I quit my job and enlisted in the Marine Corps infantry. That night during our family dinner I broke the news like this… “Mom, I quit my job, joined the Marines, and leave in two weeks. Can you pass the salt?”
In hindsight I probably should have softened the blow a bit, but my parents came around after a brief nervous breakdown.
I entered USMC boot camp in the late ‘90s weighing 115 pounds. This resulted in more than my fair share of quarterdeck time. Fast forward six months (bootcamp + school of infantry) and what seemed like 10 million pushups later, I weighed 165 pounds. The Marine Corps pushed me harder, mentally and physically, during that first six months than I knew I could go. But I liked it. Sure there was a lot of BS but I understood the bigger picture. They were breaking me down to build me up stronger. They were forcing me to rely on others. They were forcing others to rely on me. They were teaching us to rely on each other to move towards common goals.
I served four years and got out as a Sgt of Marines, the best job in the entire Marine Corps. Throughout my time in the Corps I was taught many life lessons. I became comfortable with calculated risk. I was confident in my ability to move forward on an 80% solution knowing that I’d be able to adapt and overcome whatever was thrown at me. I learned about perseverance. I experienced huge highs and lows filled with excitement and terror, ultimately figuring out how to remain calm in situations of uncertainty. I was exposed to some of the finest leaders on the planet, who provided exceptional examples of how to lead from the front.
Most of all, I quickly realized that the Marine Corps (and life) is what you make of it.
As I transitioned out, I didn’t know what the next chapter looked like. I worked full time while attending college 1-2 classes at a time. Because of my military experience (and the recruiter being a Navy guy) I was able to get a sales manager gig at a Fortune 100 company. The work was OK but not very fulfilling. Like many vets, I wandered aimlessly for a bit, searching for that camaraderie I had with my old unit. There were pockets of it, but certainly not the same.
Shortly after I graduated from college the world began to fall apart financially. 2008. Being a Marine, I saw smoke and ran towards it. If there was ever a time people needed help with their money it was then. I got licensed and jumped into the financial services industry as a financial advisor. People were afraid. Paralyzed with fear. I felt as though I could be a voice of reason for them and help them. It was very rewarding.
Unfortunately the industry is set up largely to take care of people with lots of money. They have armies of advisors flocking to them constantly. The people who needed the most help though were the middle class, and they weren’t getting the same level of service as the rich people. During that time I became interested in low cost index funds, asset allocation, and something called Modern Portfolio Theory. It was my way to address the problem.
That is when the idea for Divvy Investments was born.
I wasn’t in a position to start a company at the time. I went to grad school, spent a few years in consulting, and ended up back in the corporate world again. In the corporate world I was frustrated a lot. At one point I was actually told to care less about customers. That was the moment I knew I needed to work for myself. I quit my job and started a business (after getting the blessing from my wife, of course).
I was excited. I was scared. I had an idea that I thought could be a viable business, but I didn’t have all the answers. It was a calculated risk. I was confident in my ability to adapt and overcome with an 80% solution from my training in the Marines. I knew I could remain calm while being faced with the uncertainties of running a business. I had learned years prior that life was what you make of it and I was passionate about helping people simplify investing.
I started Divvy Investments in April 2015 with the goal of helping DIY investors make better decisions with their retirement savings. Since then I’ve added a co-founder, gotten to pitch/speak at events around the country, and stumbled into another market, selling our robo advisor tool to other financial advisors. Helping people while doing what I love is very fulfilling. We have a long ways to go with our company to achieve our mission, but we are bringing in more money than we are spending which is a good start.
Being an entrepreneur is not easy. You never know what situation you’re going to encounter. There are highs and lows every day. Most businesses fail. It is tough. I think what gives us, as veterans, an edge is understanding the parallels between our time in service and entrepreneurship. We know the value of a clear mission. We know how to assemble/train teams with talented people. We understand how important it is to lead by example. We are driven by a sense of mission accomplishment. We’ve persevered, adapted, and overcome strenuous situations many times before.
I’ve always been drawn towards challenges. I’ve added a few more pounds since my days on active duty. Probably from the salt… That’s my story and I’m sticking to it.
As originally posted at http://the-military-guide.com/marine-veteran-entrepreneur/
“In this world, nothing can be said to be certain except death and taxes.” – Benjamin Franklin
It’s that time of year again. No, no. I’m not referring to the time of year when people abandon their New Year’s resolutions, though that is probably true also. I’m not referring to the time of year when a new season of "Game of Thrones" is beginning…wait, is it? If so, stop reading this and commence binge-watching. I digress…
It is the time of year when accountants excitedly say goodbye to their families and begin crunching numbers into the wee hours of the morning. It is the time of year when some begin to get excited about what to do with their tax refunds while others repeatedly tell them that they are loaning money to the government. It is the time of year when receipts fill shoeboxes. It is the time of year when we realize we should have saved receipts (Doh!).
Don’t worry. The only thing to fear is fear itself…and perhaps going to jail for tax evasion…but mostly just fear itself. Instead, focus on these tax tips to help you get through the season.
7 Tax Season Tips
Don’t wait until the last minute. Get a head start. It is much more relaxing and gives you time to adjust to surprises if needed. Procrastinating could lead to mistakes. Mistakes could lead to fines. Fines could lead to jail.
Get organized. As with most things in life, the more organized you are the smoother things tend to go. Hopefully, you took a little bit of time periodically throughout the year to organize things. If not, just do it. Take a day and chalk it up as a loss. Get it done. Get organized yesterday. It will help clear your head and make your CPA happy (and probably save you money as a result). Remember to include all sources of income. Income, expenses, receipts…categorize them all.
Deductions. Take advantage of all the deductions you are allowed.
Stay organized. You took the time to get organized. Now keep it that way.
If you own a business, make sure to send out W2s and 1099s to your team. Here is a link to the IRS site which will help you figure out how to handle contractors. If you don’t own a business, gather all of your income statements for all of your income sources.
To DIY or not to DIY? That is the question. You know your business. CPAs know theirs. If your situation is easy and you understand what you’re doing, give it a whirl. There are several software tools out there to help you do it yourself. If you are hesitant at all, it is probably best to hire an accountant. Ask people you trust who they use. Find someone you like and trust. If you own a business it would help if the accountant understood your industry and your business.
Double-check your work or have your accountant walk you through it before submitting. It takes a little bit of extra time, but a lot less time than having to file an amendment.
“This is a question too difficult for a mathematician. It should be asked of a philosopher" (when asked about completing his income tax form) – Albert Einstein
Full disclosure: I am not a CPA, EA, or any other tax professional. In fact, I can barely spell tax. Asking me a tax question will prompt the response of a blank stare. I’m just an organized guy who likes to keep things simple. I’m also friends with a lot of CPAs and recovering CPAs. I’ve heard them complain and seen them stress out when people don’t do the things above. Raise a glass to a healthy and happy CPA and a less stressful tax season for all! (For more from this author, see: How to Deal With the Stress of a Small Business.