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II. Asset Allocation
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II. Asset Allocation
by Tiya Lim, Kevin Grogan, Larry E. Swedroe
The Only Guide You'll Ever Need for the Right Financial Plan: Managing Your Wealth, Risk, and Investments
Copyright
Preface
How to Use this Book
Acknowledgments
I. Investment Strategy in an Uncertain World
1. The Uncertainty of Investing
1.1. Efficient Frontier Models
2. The Investment Policy Statement
2.1. The Foundation of the Investment Plan
2.1.1. The Need for Plan B
2.1.2. Mr. and Mrs. Brown
2.1.3. The Worst Case Should Not Be the Base Case
II. Asset Allocation
3. Asset Allocation
3.1. The Ability, Willingness, and Need to Take Risk
3.1.1. The Ability to Take Risk
3.1.2. The Willingness to Take Risk
3.1.3. The Need to Take Risk
3.2. When Conflicts Arise
3.3. Risk Factors
4. Equities
4.1. Equities versus Fixed Income
4.1.1. Reasons to Increase Equity Exposure
4.1.2. Reasons to Reduce Equity Exposure
4.2. U.S. Equity versus International Equity
4.2.1. Reasons to Increase International Equity Exposure
4.2.2. Reasons to Decrease International Equity Exposure
4.2.3. Costs Matter
4.2.4. Recommended Reading
4.3. Emerging Markets
4.3.1. Reasons to Increase Emerging Markets Equity Exposure
4.3.2. Reasons to Decrease Emerging Markets Equity Exposure
4.3.3. Recommended Reading
4.4. Value versus Growth
4.4.1. Reasons to Increase Value Exposure
4.4.2. Reasons to Decrease Value Exposure (or Maintain a "Market" Exposure)
4.4.3. Small-Cap versus Large-Cap
4.4.4. Reasons to Increase Small-Cap Exposure
4.4.5. Reasons to Decrease Small-Cap Exposure
4.5. Real Estate
4.5.1. Reasons to Increase Real Estate Exposure
4.5.2. Reasons to Decrease Real Estate Exposure
4.6. Your Home
4.6.1. Recommended Reading
4.7. Collateralized Commodity Futures (CCF)
4.7.1. Reasons to Increase Commodity Futures Exposure
4.7.2. Candidates for Higher Commodity Allocations
4.7.3. Reasons to Decrease Commodity Futures Exposure
4.7.4. Recommended Reading
4.8. Socially Responsible Investing (SRI)
4.8.1. Recommended Reading
5. Fixed Income
5.1. Credit Quality
5.2. Short-Term versus Long-Term Maturities
5.2.1. The Results at Different Equity Allocations
5.2.2. Reasons to Reduce Maturity Risk
5.2.3. Reasons to Increase Maturity Risk
5.2.4. Recommended Reading
5.3. Municipal Bonds
5.3.1. Maturity Risk
5.3.2. Credit Risk
5.4. Inflation-Protected Securities
5.4.1. Reasons to Increase Exposure to TIPS
5.4.2. Reasons to Decrease Exposure to TIPS
5.5. Short-Term Fixed Income versus TIPS
5.5.1. Recommended Reading
6. Alternative Investments
6.1. Convertible Bonds: Not Recommended
6.1.1. Recommended Reading
6.2. Covered Calls: Not Recommended
6.2.1. Recommended Reading
6.3. Fixed-Income Currency Exposure: Generally Not Recommended
6.4. EE Bonds: Recommended
6.4.1. Recommended Reading
6.5. Emerging Market Bonds: Not Recommended
6.5.1. Recommended Reading
6.6. Equity-Indexed Annuities (EIAs): Not Recommended
6.6.1. Recommended Reading
6.7. Gold: Not Recommended
6.8. Hedge Funds: Not Recommended
6.8.1. Recommended Reading
6.9. High-Yield (Junk) Bonds: Not Recommended
6.9.1. Recommended Reading
6.10. Leveraged Buyouts (LBOs): Not Recommended
6.10.1. Recommended Reading
6.11. Leveraged Funds: Not Recommended
6.11.1. Recommended Reading
6.12. Master Limited Partnerships (MLPs): Not Recommended
6.13. Mortgage-Backed Securities (MBS): Not Recommended
6.13.1. Recommended Reading
6.14. Precious Metals Equities (PME): Not Recommended
6.14.1. Recommended Reading
6.15. Preferred Stocks: Not Recommended
6.15.1. Recommended Reading
6.16. Private Equity (Venture Capital): Not Recommended
6.16.1. Recommended Reading
6.17. Stable-Value Funds: Generally Not Recommended
6.17.1. Recommended Reading
6.18. Structured Investment Products: Not Recommended
6.18.1. Recommended Reading
6.19. Variable Annuities: Not Recommended
6.19.1. Recommended Reading
7. Liabilities and Asset Allocation
7.1. Mortgages
7.2. Prepay the Mortgage or Increase Tax-Advantaged Savings?
7.3. Other Liabilities
III. Implementing The Plan
8. Individual Securities or Mutual Funds
8.1. Convenience
8.2. Diversification
8.3. Size Matters
8.4. Advantages of Individual Securities
8.5. Separate Account Managers
8.6. A Word of Caution
8.7. Summary
8.7.1. Fund Selection Criteria
9. Active versus Passive Management
9.1. The Evidence
9.1.1. Mutual Funds
9.1.2. Pension Plans
9.1.3. Individual Investors
9.2. The Search for the Holy Grail: Why Is Persistent Outperformance So Hard to Find?
9.3. The Value of Economic Forecasts
9.4. The Value of Security Analysis
9.5. Buy, Sell, or Hold?
9.6. The Tyrannical Nature of an Efficient Market
9.7. The Prudent Investor Rule
9.8. The Benefits of Passive Investing
9.9. Summary
10. The Asset Location Decision
10.1. Exceptions
10.2. Order of Preference
10.3. Additional Considerations
10.4. Advanced Concept
10.5. Balanced and Lifestyle Funds
11. The Care and Maintenance of the Portfolio
11.1. Rebalancing
11.1.1. The Rebalancing Table
11.1.2. The Rebalancing Process
11.2. Tax Management Strategies
11.2.1. Tax Loss Harvesting
11.2.2. The Mechanics of Harvesting
11.2.3. Swapping Back
11.2.4. Using ETFs
11.2.5. When Does Similar Become Too Similar?
11.2.6. What if Capital Gains Taxes Rise in the Coming Years?
11.2.7. Avoiding the Wash Sale Rule
11.2.8. Other Tax Management Strategies
11.3. Final Considerations
IV. The Investment Plan and Financial Security
12. College Savings Plans
12.1. 529 Plans
12.1.1. Features
12.1.2. Prepaid Tuition Plans
12.1.3. Features
12.2. Coverdell Education Savings Accounts
12.2.1. Features
12.3. Custodial Accounts
12.3.1. Features
12.4. U.S. Savings Bonds
12.5. Financial Aid Impact
13. Insurance
13.1. Risk Management
13.1.1. Company Quality
13.1.2. Investment Risk
13.1.3. Guaranteed Death Benefits
13.1.4. Term Life
13.1.5. Whole Life
13.1.6. Guaranteed Death Benefit Universal Life
13.1.7. Universal and Variable Life: Not Recommended
13.1.8. Variable Whole LifeāNot Recommended
13.2. Payout Annuities
13.2.1. Longevity Risk
13.2.2. When Annuities Can Be the Right Choice
13.2.3. When to Purchase a Fixed Annuity
13.2.4. Why Aren't More Payout Annuities Purchased?
13.2.5. Recommended Reading
13.3. Long-Term Care Insurance (LTCI)
13.3.1. Why People Fail to Plan
13.3.2. Understanding the Product
13.3.3. The Importance of Long-Term Care: A Monte Carlo Analysis
13.4. Life Settlements
13.4.1. Background
13.4.2. Benefits
13.4.3. Risks
13.4.4. Opaqueness of the Bidding Process
13.4.5. Market Changes
13.4.6. Conclusion
14. IRAs and Retirement/Profit Sharing Plans
14.1. Roth versus Traditional IRA
14.2. Five Key Facts
14.2.1. One
14.2.2. Two
14.2.3. Three
14.2.4. Four
14.2.5. Five
14.2.6. Summary
14.3. What to Do When Retirement Plan Choices Are Poor
14.4. IRA Conversions
14.4.1. Limitations
14.4.2. Who is Eligible for the Roth Conversion?
14.4.3. Who Should Consider a Roth Conversion?
14.4.4. Who Should Not Consider a Roth Conversion?
14.4.5. Partial Conversions
14.4.6. What if the Conversion Was a Mistake? (Recharacterizations)
14.4.7. The Pension Protection Act of 2006
14.4.8. Conversions from Non-Deductible IRAs
14.4.9. Summary
15. Social Security
15.1.
15.1.1. How Benefits are Determined
15.1.2. When to Take Benefits
15.1.3. Factors to Consider
15.1.4. Taking Benefits Early
15.1.5. Delaying Benefits
15.1.6. Taxes
15.2. Is Social Security a Balance-Sheet Asset?
15.2.1. File and Suspend Strategy
15.3. Double Dipping Strategy
15.3.1. Summary
16. Determining a Safe Withdrawal Rate
16.1. Monte Carlo (MC) Simulations
16.1.1. Summary
16.2. In the Absence of an MC Simulator
16.2.1. The Safe Withdrawal Rate
16.3. The Sequencing of Withdrawals to Fund Retirement
16.3.1. Traditional IRA versus Roth IRA
16.3.2. Sensitivity Analysis
16.3.3. Summary
17. Planning Beyond Your Lifetime
17.1. Estate Planning
17.1.1. Recommended Reading
17.2. Preparing Your Heirs
17.2.1. What do Parents Worry About Most?
17.2.2. Are Your Heirs Prepared for their Assets?
17.2.3. Taboo Topic
17.2.4. Those who Fail to Plan, Plan to Fail
17.2.5. Benefits of Creating a Family Wealth Mission Statement (FWMS)
17.2.6. Recommended Reading
Conclusion
A. Effective Diversification in a Three-Factor World
A.1. Independent Risk Factors
A.2. Diversifying Risk
A.3. Risk Aversion
A.4. Considerations
A.4.1. Summary
B. Dollar Cost Averaging
B.1. Why Is DCA so Popular?
B.2. When does DCA make Sense?
C. Reverse Mortgages
C.1. Reverse Mortgage Features
C.2. Loan Considerations
C.3. Eligible Property Types
C.4. How Are Payments Received?
C.5. Types of Reverse Mortgages
C.5.1. Single-Purpose Reverse Mortgages
C.5.2. HECMs
C.6. Beware of High Up-Front Costs
C.7. Other Points
C.8. Summary
D. How to Choose an Adviser You Can Trust
Notes
Chapter 2
Chapter 2
Chapter 3
Chapter 4
Chapter 6
Chapter 7
Chapter 9
Chapter 13
Chapter 16
Chapter 17
Appendix C
Sources of Data
Glossary
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2. The Investment Policy Statement
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Part II. Asset Allocation
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