Can you explain the “asset allocation” theory when it comes to investing?
The asset allocation theory is one touted by lots of people in the financial community. It’s also a theory with which I disagree.
In short, the asset allocation theory means that you invest aggressively while you’re young. Then as you get older, you move toward less aggressive funds. If you follow this theory to the letter, you’re left pretty much with money markets and bonds by the time you’re 65.
The reason I don’t believe in this theory is simple. It doesn’t work. If you live to age 65 and are in good health, there’s a high statistical likelihood that you’ll make it to 95. The average age of death for males in this country is now 76, but that includes infant mortality and teenage deaths. So, a healthy 65-year-old man in America can look at having another quarter century on earth. If you move your money to bonds and money markets at age 65, inflation is going to kick your tail. Your money will grow slower than it will devalue, and you’ll have little purchasing power. That’s the problem with the asset allocation methodology.
I advise investing in good, growth stock mutual funds that have strong track records of at least five to ten years. Spread your money across four types of funds: growth, growth and income, aggressive growth and international. These groups provide diversification across risk, as well as a little splash overseas.
Great question, Matthew!
* Dave Ramsey is America’s trusted voice on money and business. He has authored five New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover, EntreLeadership and Smart Money Smart Kids. The Dave Ramsey Show is heard by more than 8 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.