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Stay The Course | Ep 188

Rick Ferri joins the show to discuss asset allocation.

This is second installment of his interview. If you’d like to hear about Rick’s backstory and his views on index funds vs the asset under management model check out his first interview, Escape From Wall Street.

Asset Allocation

Asset allocation is like a birthday cake. The layers are your asset classes, stock, fixed income, and cash. How to allocate between these layers is 90% of the cake. The most important decision you make as an investor is how to weight these layers.

The second decision is where to invest each of these layers. Broad market index funds such as total us stock market fund or total world index fund. For bonds, you might invest in a total bond market index fund, or a combo of CDs and a total bond market fund. And cash you’ll likely keep in a money market fund.

At this point you’ve built 95% of your cake–or investment strategy.

The icing on the cake is small decisions like do you want to add some real estate, or emerging markets, or more technology funds. And the candles are one-off speculative such as buying an individual stock.

Small Cap Value

Paul Merriman calls small cap value an asset class but Rick disagrees stating that small cap value stocks are included in a broad-based total stock market fund. Rick believes going after specific types of stocks, such as small cap value, overweights that portion of your asset allocation. Which is fine if you are willing to take that risk.

If you are going to weight heavily towards small cap value stocks you need to stick with it for the long term–like 25 or 30 years.

Listen: Paul Merriman Introduces The Ultimate Buy And Hold Portfolio

Bond Allocation

Conventional wisdom says your age should dictate what percentages you should have in stocks and what percentage you should have in bonds. Rick disagrees with this approach. This is an individual decision. Your risk tolerance drives this decision, not your age.

Rick’s investment philosophy is low-cost index investing. But he believes that investment strategy is determined by the individual and very personal. If you believe in your asset allocation you are more likely to stick with it during a downturn.

Deciding Your Own Asset Allocation

All you need to do is figure out what percentages will be in your cake layers–stocks, fixed income, cash. This will be 90% of your investing decisions.

Which specific index funds you should use is less relevant. How much can you handle in a down market? when the market went down 30% in three weeks, what did you do? What did you want to do? Are you going to follow your own investment policy?

Investing is not a sprint–it’s a long term marathon.

Listen: JL Collins Stock Series Part 1

Should You Invest A Lump Sum Right Now?

The math suggests you should invest a lump sum, however emotionally it may not be the best strategy. If doing so will cause you to lose sleep if things are more volatile going forward. If you aren’t up for taking the risk, dollar cost average the money in over time.

Connect With Rick Ferri

Check out his website

Listen to his Boglehead Podcast

On Twitter at @rick_ferri

He is also active at

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