When Cora was younger, she had no earthly idea what an asset was. When she entered her teen years, she began to understand the meaning of assets, but she applied them to herself rather than outside of herself. In other words, her assets were her shoes, her hair, and the color of her eyes?whether any of these attributes were pleasing to others or not. However, as she became more aware of the world around her, she began to realize her assets include values other than her physical appearance. Understanding one of these values - the value of money - will be one of the factors in how well she fares later in life.

To help her save for her later years, I wanted her to understand asset allocation. Why? One reason is the safety inherent in diversification of funds. The other reason is that it's just cool to say, "I'm into asset allocation," and actually understand what we're saying.

A few years ago, when I first tried to help Cora understand asset allocation, I thought the best way would be to help her understand budget percentages. I took out ten one dollar bills, and laid them on the table. Then, I pulled three dollars out and told her this money went to pay Uncle Sam for taxes. Then I took away three more dollars, and told her these three dollars paid the rent. Then I took another dollar away, and told her this paid the utilities. That left us with three one-dollar bills.

"Now," I said, "How much do you think it takes to eat and pay for food and other items?" She took one dollar from the table, and I laughed. I took the other two dollars from the table, and replaced them with two quarters.

"This is what we have left after all the other things we buy," I said. Cora looked fearful, and I automatically thought I made a mistake by showing her how little we had left. Actually, it scared the pudding out of me, too. Then I realized that this percentage is what most people live with, and I explained to her that we weren't alone in our budget allocations. However, she still wanted to know how we would survive with just two quarters in our pockets (this was convenient, as it was one quarter for me and one quarter for you-know-who).

Cora never forgot this lesson, and when she became older she wanted to know how we could manage to save and invest our two quarters and still live the "lifestyle to which we were accustomed." (read: lifestyle studded with impulse buying).We were both relieved to discover we could break allocations down into three distinct and understandable categories. Although not all of them are romantically risky, we found this was a good thing:

GROWTH: This portion of our asset allocation is built from stock acquisitions. Like our children, growth funds might take time to mature. Also, our investments in growth funds might be riskier than in the following two portions of asset allocation, but the rewards can also be larger. I say "might" and "can" because the risks are variable dependent on the company we choose, and the cycle of the market. It helps to remember that ownership of stock is part ownership in a company.

Also, even though this portion of asset allocation appears liquid, we don't want to touch these funds once we invest them unless we make the decision that our choices are no longer profitable or we've managed to reach specific short- or long-term goals. Profit from this portion of asset allocation comes through dividends (if the company pays them), and through price appreciation. Since the rewards can be great or the punishment horrific, we want to make sure we further diversify in this area. We don't want to pick just one stock and hope for the best.

FIXED: This portion of our asset allocation consists of bonds. Like fixed income, this portion of asset allocation is fairly rigid, because we lend our money to the "issuer" of the bond, and we don't receive it back until the bond matures. When the bond reaches maturity, we get our money back plus a fixed rate of interest. This is much better than lending money to your cousin Fred, unless Fred pays you exorbitant interest on your loan to him and actually pays you back.

The risk in fixed assets is less than growth funds, but the return also decreases when there's less risk. However, this form of investment can provide a focus on future goals. If we know that we will receive our money back with a fixed rate of interest in a certain number of months or years, then we can plan to use that money for our goals without fear of a market dip right at the moment we intend to use our money in the growth portion of our asset allocations. You can find out more about BUYandHOLD's closed-end bond funds if you click here.

LIQUID: This includes cash we keep in reserve for emergencies. However, we don't want to keep it under a mattress when we can make a bit of profit for our efforts. Here, we can look at money market funds, CDs (not the ones we play on the compact player), and savings accounts, preferably ones paying compound interest. Since this last portion of asset allocation is the least risky, it also pays out the least profit.

We were delighted to find money market resources at BUYandHOLD, but we weren't familiar with their workings. Next we'll explore how we can take advantage of these tools for this portion of our asset allocation.

Until Then,
Linda Goin