Well, it's time to start thinking about how to invest all those delicious funds. I believe that the markets are fairly efficient, so I prefer to purchase index mutual funds whenever possible, and low-expense ratio actively managed funds when an index isn't available. Here's a list of the various asset classes I identified that most investors have access to through mutual funds:
- Large cap US equity
- Small cap US equity
- Large cap international equity
- Small cap international equity
- US bonds (subsets: I-bonds, government, investment grade, junk)
- International bonds (hedged and unhedged)
- REITs
- Precious metals
- Commodities (overlaps with metals somewhat)
Over time, I would like to build my portfolio to include all of these asset classes in order to take advantage of the low correlation between many of them. Of course, more sophisticated investors may invest in:
- individual real estate (residental/commercial)
- hedge funds
- private equity
- collectibles (art, classic cars, etc.)
- futures/options (more speculation that investing)
But at this point in time, I don't have financial resources to consider any of these, so I'll stick to the basics. I haven't thought through the exact percentages that I want to put in each of the nine classes listed above, but I want to break it down 70% equity / 30% bonds. The equity portion should be split evenly between US and international funds, with each group split evenly again between large cap and small cap stocks. Right now, I'm just trying to get my money into the market...I'll worry about fine tuning my asset allocation plan a few months from now.
The entire process is made more difficult by the different accounts I have, each with a different tax-status and available funds. For example, my 401k has some great index funds in it, but I can't just lump-sum a big contribution...it has to be done through monthly payroll deductions. Then there's the Roth IRA with it's own rules, and finally the taxable account with the most freedom of choice, but the highest tax penalties.
