Slide 1: Title Slide - Building Your Investment Portfolio: Asset Allocation and Strategy

On this slide, you see our topic for today: 'Building Your Investment Portfolio: Asset Allocation and Strategy.' This is all about your investment mix.

Before we get too deep, let's quickly recap what we covered in our last lesson:

• Stocks, which are like owning a tiny piece of a company. When the company does well, your piece goes up in value.

• Bonds, which are essentially lending money to a company or government, and they pay you back with interest. It's like being a bank!

• And Funds and ETFs, which are like baskets of investments – they can hold many different stocks, many different bonds, or a mix of both.

We also talked about how diversification is key! That means not putting all your eggs in one basket, spreading your investments around to reduce risk.

Today, we're going to build on these basics. This lesson is truly about how to combine these different types of investments into one cohesive, powerful strategy that works for you."

Slide 2: Asset Allocation: Your Investment Pie

So, what exactly is asset allocation? On this slide – that's our investment pie chart!

Asset allocation is simply deciding how to slice up your investment money among different types of investments, or 'asset classes,' like stocks (both US and international stocks), bonds, and even cash.

For example, the four found chart on the side, shows 50% US stock, 30% International stocks, 15% bonds and 5% money market. The crucial thing to understand here is that it’s not about picking individual 'winners.'

We're not trying to find the next hot stock.  Instead, it's about picking a broad fund allocation – deciding on the percentages for those big categories like 'all stocks' or 'all bonds' through diversified funds.

This is a strategic decision that sets the foundation for your portfolio."

Slide 3: Why Asset Allocation is So Important

Now, you might be wondering, 'Why does this pie slicing matter so much?'

Asset allocation is actually the biggest factor determining your portfolio's long-term return and how much risk you're taking. Yes, you heard that right! How you divide your money among asset classes is generally more impactful for your long-term success than trying to choose the absolute best individual investments.

The goal is to match this allocation to YOUR specific situation: YOUR time horizon (how long until you need the money) and YOUR risk tolerance (how comfortable you are with ups and downs)."

Slide 4: Asset Allocation and Your Age/Time Horizon

Let's explore those factors, starting with age.

Young investors have a longer time horizon. Because of this, it makes sense for them to have more stocks and fewer bonds. This strategy focuses on growth, as stocks historically offer higher long-term returns.

As you get older and your time horizon shortens, the strategy typically shifts. Older investors tend to have fewer stocks and more bonds. The focus here moves from aggressive growth to the preservation of your wealth, as you'll need that money sooner.

The chart on this slide shows your allocation of stocks versus bonds based on your risk tolerance and age. If you have moderate risk tolerance, follow the middle column and the Rule of 110. For example, at age 30, you would have 110 - 30 = 80% stocks.

Slide 5: Beyond Age: Your Personal Risk Tolerance

While age gives us a general guideline, it's not the only piece of the puzzle. We also need to consider your personal risk tolerance.

Ask yourself: 'How comfortable am I with my investments going down in value in the short term?' Because, let's be honest, the market has bad days, weeks, or even years. Your comfort level with those temporary dips matters, even if you have a long-term horizon. Some people are more risk-averse, even if they are young.

The chart you just saw on the previous slide, which showed the allocation of stocks versus bonds based on age, also indirectly reflects different risk tolerances. A more aggressive portfolio would have a higher allocation to stocks, while a more conservative one would have more bonds.

A simple rule of thumb for risk tolerance, often called the 'Rule of 100, 110, or 120,' helps you figure out your stock allocation. You subtract your age from the rule number to get your suggested percentage of stocks

Slide 6: Typical Asset Allocation for Young Adults

In summary, your asset allocation will depend on your age and your personal risk tolerance. When you look at the Model Portfolio for Age Groups chart on the previous slide, you will see how a 30-year-old's allocation will change. For example, consider the three personal risk tolerance categories:

• Aggressive: maximum growth potential; 90% stocks, 10% bonds

• Moderate: balanced growth and stability; 80% stocks, 20% bonds

• Conservative: safety first; 70% stocks, 30% bonds

Slide 7: Target-Date Funds

Now, I know all this talk about percentages and adjusting allocations might sound a bit complex. But here’s some great news: there’s a simple, hands-off way to manage this, and we briefly touched on it before: Target-date funds.

These funds automatically manage your asset allocation for you. They start out with a more aggressive mix (more stocks) when you're young, and then automatically and gradually shift to a more conservative mix (more bonds) as your target retirement date gets closer.

The way they do this is through something called a 'glide path.' As you get older, the fund's glide path automatically increases its bond allocation, becoming more conservative over time. It's an easy way to implement an age-appropriate strategy without having to constantly monitor and adjust it yourself.

The chart on this slide shows how the percentage of stocks (both domestic and global) and bond funds automatically change over time. For example, if you are 35 years from retirement, you will have 90% in equity funds (U.S. and global stocks) and 10% in bonds. As you get closer to your retirement date, you will decrease your stock allotment and increase your allocation to bonds and short-term funds (cash).

Slide 8: Keeping Your Mix Right: Rebalancing

Even with a great initial asset allocation, or even using a target-date fund, you need to be aware of something called rebalancing.

Over time, your initial investment mix will drift. Market changes cause your actual allocation to shift from your target percentages. For example, if stocks have a really great year and go way up in value, they might now make up 95% of your portfolio, even if your target was 80%. Your 'pie slices' change size because some investments perform better than others.

Rebalancing simply means bringing your portfolio back to your desired percentages. It's like trimming a bush that's grown unevenly so it returns to its intended shape.

Slide 9: Why Rebalance

So, why bother rebalancing? It might seem like extra work, but it's really important for a couple of key reasons.

First, it helps maintain your desired risk level. If your stocks surge and become a much larger percentage of your portfolio, you're now taking on more risk than you initially intended. Rebalancing brings you back to your comfort zone.

Second, and this is pretty cool, rebalancing is a form of 'buy low, sell high' – relatively speaking. When you rebalance, you're essentially selling some of the assets that have done really well (and are now 'overweight' in your portfolio) and using that money to buy more of the assets that haven't performed as well (and are now 'underweight'). It's a disciplined approach to selling assets that are comparatively expensive and buying those that are comparatively cheaper.

Slide 10: How to Rebalance

Now for the practical part: How do you actually rebalance?

You can do this periodically, perhaps annually or semi-annually. Don't feel like you need to do it every week!

There are two main ways:

• You can sell some assets that are now 'overweight' (meaning they've grown to be a larger percentage than your target) and then buy assets that are 'underweight' (meaning they've shrunk or haven't grown as much). This directly adjusts the percentages.

• Or, even easier, if you're still regularly contributing money to your retirement savings, you can direct your new contributions to the 'underweight' asset classes until you reach your target percentages. This is often the simplest and most efficient way for active savers, as you don't even have to sell anything!

On the other hand, target-date funds rebalance automatically through a pre-determined strategy. This means that the fund's underlying asset allocation (the mix of stocks, bonds, and sometimes other investments) is adjusted over time without you needing to do anything manually

Slide 11: Wrap-up & Follow-up Action Step

Let's bring it all together. What are the key takeaways from today's lesson?

• Remember, asset allocation is key to your investment strategy. It’s the foundation upon which your financial growth will be built.

• Align your investment mix with your age and risk tolerance. For most young adults, this likely means a growth-oriented approach with more stocks.

• And finally, periodically rebalance to stay on track! This ensures your portfolio continues to match your goals and risk comfort.

Now, for your Action Step for this lesson: I encourage you to think about deciding your target asset allocation for your retirement savings based on your age and risk tolerance.

Or, if you prefer the hands-off approach, explore using a target-date fund.

If you already have a brokerage account—the platform where you're investing—see what investment options are available to you.

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