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Asset Allocation | What You Need To Know - YouTube
Channel: Tae Kim - Financial Tortoise
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what is asset allocation and the more
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important question is do you need to pay
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attention let's find out hi if you're
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new to the channel my name is tay from
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financial tortoise a channel dedicated
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to helping the sound generation reach
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financial security also if you like a
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free copy of my science generations
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guide to financial security 10 steps to
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securing your family's financial future
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please go to my website
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financialtortoise.com and download your
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copy today i'll also have a link in the
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description below in this video i want
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to talk about asset allocation and most
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importantly what you need to take away
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from it
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when it comes to investing it's very
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important to diversify your holdings you
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don't want to have all your money
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invested in one company or in one risky
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bet
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then one day i got bored and i took all
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my money and i bet it on the jets
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[Applause]
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this is why investing in low-cost index
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funds like vtsax is great because
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automatically provides you that
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diversification however smart investing
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doesn't just end there you want to take
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it one step further by allocating your
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money across different asset classes as
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well stocks represent just one asset
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category there are many other asset
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categories out there like bonds
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commodities and even cash investing in
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only one asset category over the long
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run can actually be quite risky in
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essence a well-balanced and strong
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portfolio will not only be well
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diversified within an asset category but
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also well allocated across multiple
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asset categories barbara's tristan said
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it best in their 1969 movie hello dolly
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money pardoned expression is like manure
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it's not worth the thing unless it
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spreads around encouraging young things
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to grow just like manure spread your
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money around within an asset category
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and spread it around across different
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asset categories
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so you might be asking what do we need
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to do this i thought just purchasing a
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well
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total market index fund is enough why do
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i need to purchase other asset
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categories as well well the reason is
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because each asset category has
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different expected returns investing is
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by nature a risk taking endeavor when
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you choose to invest in the stock market
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you're believing that the stock market
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will appreciate in value because the
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companies within it will create value in
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the future and higher the risk you take
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generally higher potential for rewards
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down the line and because the stock
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market has generally appreciated in
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value in the last century we
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automatically assume that the stock
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market is the only place we should
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invest our money in we'll look
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specifically at vanguard's vt sax for
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the total stock market index nothing but
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up right
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but when you start diving deeper there's
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a lot of ups and downs throughout the
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upward journey the market is generally
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going up in the long run but it's a
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pretty rough ride throughout think of a
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scenario where you're heavily invested
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only in stocks but for whatever reason
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the market tanks 30 next year you're
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planning to start living off your
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investments but now you can't you'll
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literally be losing money if you start
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selling your investments now you have to
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wait to see whether your money will
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climb back up hopefully soon but you'll
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never know you were taking a risk when
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you started investing in the market this
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is the price of risk you have to pay and
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this theoretical scenario is actually
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not so theoretical
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lack of attention to appropriate ass
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allocation have and will continue to
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have an impact upon millions of
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americans in the last recession many
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baby boomers saw catastrophic drops in
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their portfolios because they weren't
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properly allocated those who were
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invested in all equity saw their net
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worth decline by double digits some
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sadly sold during the downturn because
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they needed the money and by doing so
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miss out on some amazing rebound over
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the next several years you don't want to
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be one of those in these situations a
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key component to determining the
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appropriate asset allocation for you is
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your age and your risk tolerance if
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you're in your 20s and have decades to
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grow your money a portfolio made up of
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mostly stocks make good sense you have
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time to weather the storms you can take
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the risk so go heavy into stocks like
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total market index fund however if
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you're older and retirement is coming up
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right around the corner you will want to
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taper back your risk and the way you
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taper back your risk is by using bonds
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bonds can act as your counterweight to
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stocks stocks and bond prices usually
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move in opposite directions when the
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stock market is doing well investors
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prefer the market over bonds thus stock
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prices go up while the bond demand drops
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however when stock market is not doing
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well and becomes risky for investors
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investors withdraw their money and put
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it into bonds which they consider safer
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this increased demand raises bond prices
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by having bonds in your portfolio they
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act as a buffer against you losing a
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sizable portion of your portfolio when
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the stock market tanks
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so if you're in the later stages of your
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life and you want to reduce your risk
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begin balancing your portfolio with
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bonds another scenario where really
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reducing your risk via more bonds makes
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sense is if you accumulated a very large
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portfolio enough where you no longer
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need to expose yourself to unnecessary
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risk in one famous example susie orman
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the famous personal finance expert was
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asked where she put her money she said
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of her liquid net worth of 25 million
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dollars she only had 1 million in the
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stock market in the rest in bonds given
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all the advice about investing in the
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market the journalist who asked the
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question was shocked how could she have
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so much money in bonds and not in the
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market she said she had about 25 million
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good reasons that most people didn't
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once you've won the game there's no
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reason to take unnecessary risk so if
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you happen to have 25 million reasons
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like suzy orman having bonds in your
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portfolio might be a good option
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all right now that you understand why
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having bonds in your portfolio is
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important let's look at how much might
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be appropriate for you just to give you
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a warning the pursuit of perfect asset
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allocation is heavily debated topic and
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there is no one-size-fits-all approach
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to asset allocation as well as investing
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in general i want to share with you
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sample allocation from vanguard's target
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retirement funds if you're hearing about
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target retirement funds for the first
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time check out my video here where i go
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deeper into it if you're in your 20s and
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are about 40 to 45 years from retirement
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you can see here how little bonds you
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might need in your portfolio less than
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10 percent however as you get closer to
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your retirement age let's say 10 years
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from retirement you can increase that to
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35 percent of portfolio to reduce your
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risk and if you're already in retirement
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it could make up 70 of your portfolio
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one thing to note is that these
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allocations are just a general rule of
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thumb some people might prefer to have
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hunch percent in stocks until they're in
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their 40s others are more conservative
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and want more money in bonds in their
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20s though i highly recommend against
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this since you have time on your side
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let me also share with you a few other
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popular asset allocations as a point of
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reference jill collins the author of
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simple path to wealth takes on a more
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aggressive approach with this asset
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allocation he recommends when you're in
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your wealth accumulation phase when
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you're still investing into the market
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he recommends 100 in stocks specifically
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vtsax the total stock market index fund
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he believes that you should be
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aggressive in your wealth accumulation
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phase and i personally agree you have
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time on your side and because you're in
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your accumulation phase the market ups
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and downs don't matter now when you're
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in your wealth preservation phase when
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you're living off your investments he
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allocated his fund to 75 percent stocks
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vtsix
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20
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to bonds vbtlx and 5 cash compared to
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the generic vanguard target retirement
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fund asset allocation we saw earlier
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this is definitely more aggressive i
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personally like being more aggressive
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right now but who knows a decade from
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now right we all change and the great
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thing is our asset allocation can change
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with us as well let me share with you
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one more asset allocation ray dalio's
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all-weather portfolio ray dalio is a
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pretty famous hedge fund manager and the
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founder of bridgewater tony robbins
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popularized this allocation method in
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his book money mastered a game the base
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of this allocation portfolio is that
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they believe it will do well in any
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market climate and there's a lot of
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support to that assumption given that
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this portfolio is based on bridgewater's
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all-season investing strategy in case
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you didn't know bridgewater is the
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largest hedge fund in the world with
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hundreds of billions in assets under
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management and the general breakdown is
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as following 30 stocks 40 long-term
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bonds 15 intermediate bonds 7.5
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commodities and 7.5 gold bit more
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complicated than vanguard or jail
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columns approach i'm not showing you
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this allocation to say that you should
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follow it but to give you an example
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that there's a lot of different flavors
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of acid allocation out there
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but i want to share this with you
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asset allocation is important but for
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most people the biggest danger in their
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investing journey isn't if their
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portfolio is too aggressive or too
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conservative it's actually that people
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don't invest enough or anything at all
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i've seen too many people who focus way
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too much time looking for the perfect
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fund and the ideal asset allocation yet
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don't have much money invested in the
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market it's important to understand the
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basics but not to get too wrapped up in
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all the details this can lead to
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analysis paralysis and keep you from the
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most important part of growing your
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wealth
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saving and investing more money i
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believe that over time we can all learn
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to manage our asset allocation as we get
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more proficient in investing and have a
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good understanding of our own risk
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tolerance and know that it will change
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with time you might be okay with being
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aggressive with your investments now but
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when you have 25 million dollars in
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liquid assets like suzy orman your risk
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tolerance might change understand that
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appropriate asset allocation is a tool
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that will help you manage that risk
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thank you guys for watching i know the
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right asset allocation is a heavily
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debated topic so i'd love to hear your
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thoughts on this maybe what your
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approach is and how you've managed risk
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at your stage of life so far
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[Music]
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you
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