Bucket investing strategy Asset Allocation Bucket investing strategy

How to Save Money & Build Wealth! Banks Checking & Savings accounts, credit cards, loans, etc Brokerage Firms Specialize in accounts for stocks, bonds, mutual funds => where you SAVE! Link checking & brokerage accounts keep them at separate institutions Save $ through Direct Deposit & Automatic Investing 90% of Paycheck to Checking 10% of Paycheck to Brokerage

Brokerage Accounts Most financial institutions offer brokerage accounts allow you to invest in stocks, bonds, mutual funds, commodities, etc…. Beware: many brokerage firms have high/hidden fees mutual funds fees, management fees, etc…..

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Asset Allocation Process of dividing your savings into investment “buckets” Buckets picked based on Risk Tolerance & Time Horizon $100,000 Portfolio I think I’m Brilliant very high risk! Cash Account no risk Bonds med. risk Stocks high risk Real Estate risk?

Returns before inflation = nominal return Real & Nominal return per year by Asset Class 1925 - 2012 Returns before inflation = nominal return . = real return Savings Account

$100,000 Portfolio: Step 1: Asset Allocation: Choose investment by bucket

Cash Accounts Money Markets, Bank CD’s, Savings account: are short term accounts where you earn the federal funds rate (currently 2.25%) Purpose: to have “liquidity” for planned & unexpected expenses Target: 6 months living expenses in “cash accounts” Expected return => usually equals the rate of inflation

Bonds Government Bonds: 2-10 year in maturity are medium risk. Purpose: For a 2-5 year holding period Expected Return: 1-2% above rate of inflation Age based allocation: Bond % Portfolio = Your Current Age 20-year old => 20% Bonds & 80% Stocks 70-year old => 70% Bonds & 30% Stocks

Stocks Minimum of 5-year holding period. risk. highest historical returns => 9.8% nominal return over 100 years Highest historical volatility => losses of 20-50% do occur in Bear markets Follow age rule: 80% Stocks & 20% Bonds (for 20-year old) Invest in diversified stock portfolio, such as the SP 500 Index Fund Minimize fees paid to mutual funds, financial advisors & brokerage companies