At the core of ZenInvestor lies the principle of balance. One common mistake that investors make is not maintaining a proper balance in our overall investment portfolio. We tend to swing back and forth between the extremes of being too heavily invested in the stock market when times are good, and not invested enough when times are bad. In this section we’ll walk you through the process of figuring out what your current state of balance is, and what steps you should take to correct any imbalances.
Balance refers to the way your entire nest egg is divided among the major asset classes of stocks, bonds, and cash. It’s the Big Picture – the view from 10,000 feet – the all encompassing summary of your financial resources.
The first step in figuring out the balance in your investments is to make a list of all your accounts, including your 401k or 403b, your IRAs, your brokerage accounts, CDs, savings accounts, money-market accounts, credit union savings accounts, etc. Include everything except the cash in your pocket and your checking accounts. (Hint: if your list of accounts has more than 4 items, you might want to think about consolidating some of them in order to simplify your financial life. We’ll discuss this later in this section.)
Now take out your latest statements for each of these buckets of money that you have listed, and write down the current balances. The total at the bottom of this list is your nest egg. In order to figure out how well your investments are balanced, you will be looking at your entire nest egg.
When we talk about balance, we’re talking about your entire nest egg. The question we’re going to consider now is, how much of your nest egg is invested in stocks, how much in bonds, how much in gold, real estate, cash, etc. At the end of the exercise, you will have your current asset allocation. Once we have that, we can figure out whether we need to make any changes.
Here is a good rule of thumb you can use when it comes to the balance of your nest egg: the most simple allocation will be roughly 70% stocks, 20% bonds, and 10% cash. These percentages will change as conditions in the economy change, but it’s a good starting point for our purposes now. If the balance in your nest egg today is very different than the above guidelines, you have some work to do. Here’s how to get started.
Begin with your retirement accounts, like your company 401k or pension plan. We suggest this because with some plans, the choices are limited. Another reason is that your retirement accounts should be the foundation of your nest egg, and the idea is to set up the allocation (balance) and only make changes when you have no other choice. It’s much easier to make changes in your brokerage account, where in most cases all it takes is a few mouse clicks.
Once your retirement accounts are squared away, take a look at your brokerage accounts. Be sure to consider your overall allocation, including your retirement accounts and your savings accounts. It usually makes sense to keep most of the cash portion of your overall allocation in your savings account. And by the way, CDs and money-market accounts are considered cash for our purposes here.
Once you have completed the rebalancing of your nest egg, it’s important to review your state of balance periodically. We suggest that you do it once every three months, but you can use any time frame that you like. The important thing is to schedule a regular review, and not allow the balance to drift too far from your benchmark.
If you would like more help with the process of balance and asset allocation, consider becoming a Premium member, where we take you through each step and give detailed descriptions as we go along.