Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jason Stipp | 11-17-2010 02:43 PM

A Quick Read on Your Asset Allocation

Morningstar's Christine Benz points the way to some simple resources for quickly benchmarking or setting a preliminary portfolio retirement mix.

Jason Stipp: I'm Jason Stipp for Morningstar.

Your asset allocation is perhaps the biggest determinant of your longer-term investment returns, but this is also an area where it can be hard to find some good information.

Morningstar's Christine Benz is here today with some quick-and-dirty tips for how to get a read on your existing portfolio's asset allocation, or to set a blueprint for an allocation on a new portfolio.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So you have an array of a few tools that you can look at for a back-of-the-envelope take on your asset allocation. The first one is a set of indexes that Morningstar has. Can you tell us little bit about how those are formulated, and how they might help?

Benz: Sure, these are Lifetime Allocation Indexes and Morningstar originally created these as in an effort to provide benchmarking tools for target-date funds, so they were created in conjunction with Ibbotson Associates, which is part of Morningstar, and arguably the leading name in asset allocation, and they use Ibbotson's human capital model to arrive at target allocations for investors with various retirement dates. And there are conservative, moderate, and aggressive flavors. So I rely on these benchmarks a lot when talking about asset allocation, I think they are really useful starting point.

Stipp: So can you explain a little bit about what you mean by the human capital and what that translates to as far as allocations over time for people in different age bands?

Benz: Sure. So the basic idea is that we all, when we begin working, have a lot of human capital, meaning that we can rely on a steady stream of income over many years, hopefully. But as we grow older and certainly, as we retire, that human capital becomes a less important part of our earnings picture, and we need to rely on our financial portfolios and our financial assets to step up and make up the difference.

So the idea is that a person's human capital is quite bond-heavy initially, meaning that it will send you a stable stream of payments throughout your life, and as you get older, it becomes more equity heavy and your portfolio needs to become more conservative, your financial portfolio.

Stipp: So Morningstar Allocation Index is a good place to start for a general sense. You also mentioned that these indexes had been created as a benchmark for target-date funds. Now these funds have become increasingly popular as a one-stop shop for investors, but you don't necessarily have to invest in a target-date funds to get some good use out of them.

Read Full Transcript
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article