Selecting the Proper Investment Allocation

The following questions are designed to determine an investment allocation that will help you meet your goals in a manner that you will be comfortable with. After answering these questions you should be able to determine an investment allocation that will suit your needs.

Circle the number that best matches you answer. Add the values to determine your score.

I.    How long before you will need these dollars to achieve your goal?

1.    Fewer than 3 years -1 point
2.    More than 3 but less than 5 years – 3 points
3.    More than 5 but less than 10 years – 6 points
4.    More than 10 but less than 15 years – 9 points
5.    Longer than 15 years – 11 points

II.    Upon reaching that date, how many years will you want to withdraw money to achieve your goal?

1.    More than 15 years – 11 points
2.    More than 10 years but less than 15 years – 9 points
3.    More than 5 years but less than 10 years – 6 points
4.    More than 1 year but less than 5 years – 3 points
5.    I want all of my money in one payment -1 point

III.    What would you anticipate the future earning potential of your household?

1.    Income will go up – 2 points
2.    Income will remain constant – 4 points
3.    Income will increase at a slow and steady pace – 7 points
4.    There will be a rapid increase in our income – 9 points

IV.    When you look at your other assets, the portion that is in fixed assets like, savings accounts, pensions, etc would equal what percentage?

1.    90% – 100% – 11 points
2.    70% – 89% – 9 points
3.    45% – 69% – 6 points
4.    21% – 44% 3 points
5.    0% – 20% – 1 point

V.    Based on your comfort level, which investment goal sounds the most like you?

1.    Greatly exceed inflation with higher risk levels – 9 points
2.    Slightly above inflation with moderate risk – 7 points
3.    Barely exceed inflation with low risk – 4 points
4.    Keep up with inflation with little or no risk – 2 points

VI.    Given the investment choices below, which mirrors your comfort level?

1.    Avg. return 12% worst annual return -15% 9 points
2.    Avg. return 10% worst annual return – 8% 7 points
3.    Avg. return 8% worst annual return – 7% 4 points
4.    Avg. return 6% worst annual return – 5% 2 points

VII.    If you had the opportunity to receive better returns but had to take more risk you would?

1.    Put all of your money at risk and take a lot more risk. – 9 points
2.    Put some of your money at risk and take a lot more risk. – 7 points
3.    Put all of your money at risk and take a little risk. – 4 points
4.    Put some of your money at risk and take a little risk. – 2 points

VIII.     For the most part higher potential gains equals higher potential losses. If you were given the following investment possibilities which would you most be comfortable with? Investing $100,000 for 5 years.

1.    Option A Worse Case – $30,000 Best Case – $275,000 – 9 points
2.    Option B Worse Case – $60,000 Best Case – $225,000 – 7 points
3.    Option C Worse Case – $90,000 Best Case – $175,000 – 4 points
4.    Option D Worse Case – $105,000 Best Case – $125,000 – 2 points

IX.    Which description best matches your investment approach?

1.    Stability of principal with little chance of losing my original investment. – 2 points
2.    High income to achieve income needs with some risk. -  4 points
3.    Growth with income and moderate risk. – 7 points
4.    Capital appreciation with higher risk for long term growth. – 9 points

X.    Which best describes your attitude towards the stock market?

1.    I have never invested in the stock market – 1 point
2.    If the stock market goes down I will sell. I am nervous – 3 points
3.    I react to market swings I am uncomfortable – 6 points
4.    I usually am willing to wait and see. I consider myself patient while being concerned – 9 points
5.    Fearless, I’ m not concerned by short-term changes in the market.

XI.    What would be the strongest reason to own bonds?

1.    To diversify – 11 points
2.    They provide some predictability – 9 points
3.    They provide some steady income – 6 points
4.    They provide safety of my principal – 3 points
5.    I have never and don’t plan to ever own bonds – 1 point

Now total your score and enter the number _____________

Score range            Profile Model
17 – 34                Conservative
35- 53                Moderately Conservative
54- 72                Balanced
73- 91                Aggressive
92 and above            Very Aggressive

Model Allocations:

Conservative
6% international        10% High Yield Bonds
2% Small Cap            60% Bonds
2% Mid Cap            10% Cash / Cash Equivalents
8% Large Cap
2% Real Estate

Moderately Conservative

12% International        5% High Yield
3% Small Cap            55% Bonds
5% Mid Cap
17% Large Cap
3% Real Estate

Balanced

18% International        5% Real Estate
5% Small Cap            5% High Yield Bonds
7% Mid Cap            35% Bonds
25% Large Cap

Aggressive

24% International        5% High Yield Bonds
6% Small Cap            15% Bonds
10% Mid Cap
34% Large Cap
6% Real Estate

Very Aggressive

30% International
8% Small Cap
12% Mid Cap
42% Large Cap
8% Real Estate

There Are Different Places To Put Your Money And They All Have A Purpose

There are different places that you can put your money. None are right for every situation. Each has its own distinct advantages and disadvantages. This is a brief summary of each.

Taxable – These are accounts that have no tax advantage. You pay tax on the money that you deposit. You pay tax on any returns. You are taxed coming and going. So why would you put money in this type of account? Liquidity! This is the type of account that we want to keep our emergency money. We want to grow this account over time so that we have 3 to 6 months of living expenses in this account. Examples include checking, savings, and money market accounts. While individual stocks and mutual funds could be considered in this group I would not keep our emergency funds in these. You could include CD’s since if you needed to the institution that holds the CD’s will usually allow loans using the CD as collateral. Another reason to use these may also be used when you have exhausted your ability to contribute to the other types of accounts. They have no contribution limits and in some cases that can be attractive.

Tax deductible – These are accounts that allow deposits to be places into the account on a tax deductible basis. The money that is put in is not taxed. The money and any earnings that are credited are not taxed, if certain conditions are met. We are not required to pay the tax until we make withdrawals. Example:
A farmer plants seed in the ground. He does not pay tax on the value of the seed. The seed grows and he does not pay tax on the value of the plants as they mature. At harvest time, the farmer harvests the plants. This is when the tax is paid. The tax is based on the value of the harvest and it is not paid until that time. Which has a higher value the seed or the harvest? Under most circumstances, it will be the harvest.

There are several examples that fall into this category:
1.    Traditional IRA
2.    401K
3.    403B
4.    Simple IRA
5.    SEP

The biggest advantage to this category is the employer match.  This is free money that is hard to turn down. To receive this match, the employee usually has to make contributions of their own. There are penalties for early withdrawals. Some plans allow hardship withdrawals or loans. This is the most common bucket and should certainly be part of your plan if you have an employer that provides matching. You should at least contribute to the point that the matching stops.

Tax deferred – These are accounts that tax the deposits that are made. However, there is no tax as the account grows and no tax on withdrawals. There may be some penalties for early withdrawal depending on the type if account. Let’s go back to our farmer:
Prior to planting the seed a value is established for the seed and a tax is paid accordingly. The seed is planted and it is allowed to grow. There is no tax levied while the plants are growing. The plants are harvested. There is no tax paid at harvest time. This means that we paid a tax on a smaller amount today so that we could avoid paying a tax on a larger amount tomorrow.

Some examples of this type of account are:
1.    Roth IRAs
2.    Roth 401Ks
3.    Tax Deferred Annuities
4.    Life Insurance distributions prior to death

Like the other examples we have given each have their own advantage and disadvantage. Prior to investing in any of these accounts you should consult a tax professional to determine which is best for your personal situation.

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