A new finance tool, the Five Minute Retirement Plan, does what the name implies. In only a couple of minutes, the site will create a free, customized retirement plan based on your age, current assets, and ability to invest in the future.
I gave the site a test run to see how my current retirement investing compares, and the results were interesting.
I agree with some of the results, but I believe that having 25% of a portfolio in emerging markets is a bit much. If I had built a plan myself, I would have put more weight into Mid Cap and Small Cap funds and less into Emerging Markets, but overall it is a pretty good guide.
According to the site’s creators, this is the methodology used to select asset classes for your customized portfolio:
A major goal of Five Minute Retirement Plan is to use empirical data to make investing decisions. To that end the system uses historical market data to determine a representative set of asset classes across the risk/return spectrum.
The United States, being the world’s largest economy, is allocated the majority of equity holdings in the portfolios with up to 55% of assets spread among large (30%), medium (10%) and small (15%) capitalization stocks.
In the past twenty five years, globalization has been a major economic trend, with the emerging market showing impressive gains. Since this trend is expected to continue, stocks of companies in the emerging markets (China, Brazil, South Korea, Taiwan & India, etc.) are given a weight of up to 25%.
The Asia-Pacific and European developed regions are represented by companies with large capitalizations and are given a weight of up to 10% and 5% respectively.
The US Treasury Inflation Protected Bonds and REITs are used to combat the risk of inflation and are given a weight of up to 20% and 5% respectively.
Long Term US Treasury bonds are used to combat deflation, and are given a weight of up to 20% (although in practice this asset class’s allocation will be much smaller).
Total Bond Market and Short Term US Government Bonds are allocated up to 20% and 100% respectively and are included to get low risk returns over medium and short time frames.
I recommend that anyone uses this free tool to compare their current retirement allocation. I would certainly not follow it to the dollar, but it is a good guide to help you get started with an ETF based approach to your retirement account. Be sure to use your own brain and research as well.
If you are interested, you can also read a more technical review of the site at Seeking Alpha.
In my current 401(k) plan, I think I’ve got 1/3 of it in Emerging Markets. Of course, unlike most investors, I’m more of a risk embracing investor, so it’s a little high for most. It also gave me a good cushion when the real estate crash was happening, though. Not sure there’s anything that could cushion from the global depression that’s happening recently though.
I am a bit more conservative than many investors. I like to take a Warren Buffet approach and find value investments that I believe will rise over time rather than looking for a quick buck. I try to offset risks by investing in fixed income as well.
Well, in my defense, when I made those assignments, the rest of the world’s economy was looking pretty good. (this was pre-euro issues) I’ll probably be moving my 401(k) into a rollover IRA soon, and I’ll likely dial that back a bit. But, could see it sitting at 25%, as I don’t see the US economy making any really strong comebacks anytime soon.
Makes sense. Where are you going to have your new rollover IRA?
Not sure yet. I’ve got some stuff hanging out at sharebuilder, but it’s all small time dabbling stuff. Will be taking a look at a few other places, like Charles Schwab, when I get moving on the rollover.
Thanks for sharing this resource!
That’s what I do!
Interesting tool that at least gives you a quick snapshot. I like it!
I am always a fan of tools that give you a lot of information quickly with only a little work.