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Not to long ago I read this book on financial planning, and one of the most important topic covered was asset allocation. Asset allocation refers to how you allocate the money you have available to invest. What percentage of your money goes into you secure, moderate growth, and aggressive growth baskets? Is there such a thing as asset allocation in the Caribbean? To my knowledge the average Caribbean person invests their money into property, short or long term fix deposits, and life insurance. It’s clear to see that the average Caribbean person invests only in moderate growth investments, and are not interested in aggressive growth investment where the risk is high.

asset-allocation.jpg

There are many options for where to invest your money, and every option has a different risk/reward ratio. Even in the Caribbean. You can put all your money in the high risk/reward basket, as aggressive growth -(Stocks/ Mutual Funds), and you may enjoy great gains, but you’ll also suffer huge losses in the event things go badly. You need to make about 5% just to stay even if your gains are taxable, since you have to cover inflation plus local taxes (based on typical Island figures).

What I’m really trying to bring across is that intelligent asset allocation is to enjoy strong gains without taking on too much risk of losing your money and having to start over from scratch. Basically you have to diversify the money you to invest, have some money in the aggressive growth bucket, so you have the potential to enjoy some big wins when things go well. But you also want to keep some money in your secure bucket, so you can have backup money in the case your aggressive growth goes belly-up. Asset allocation involves determining how much to put in each bucket.

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1 Comment »

Comment by Dan
2007-10-28 00:05:18

Good article, Chris. One can also use a fund such as American Funds and employ “dollar cost averaging” wherein cash from your account is invested gradually, which has the tendency of smoothing the ups and downs of the stock purchase prices.

It’s also important to understand your financial goals, which vary with age, health, need, and financial status.

Finally bear the complexities of compound interest in mind. Albert Einstein called compound interest mankind’s greatest achievement. While the formula and math are complex, a simple rule of thumb will aid immeasurably. Just divide the interest rate into 72 and the quotient will equal the number of compounding periods it would take to double the principal invested.

Foe example: Suppose you invest $5000 at 8% compounded annually. 72 divided by eight equals 9. The compounding is annual, so your money would double to $10,000 in nine years. Say you invest $5000 at 8% annual compounding at age 21 and plan to use the money at retirement at, say, age 66. That’s five compounding periods. Your money would double, then re-double, etc. four more times. The investment would be worth $160,000!

By the way, over the last 30 years, American Funds has average 15% growth. Do the math!

 
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