Faced with a turbulent stock market and an economy in flux, we are increasingly worried about our finances. And though investors admit to financial planners’ expertise, few consult one. So says a survey the AICPA commissioned to better understand how we manage our money.

Harris Interactive, an Internet-based market research firm, conducted the survey, “Report on America’s Financial Health,” for the AICPA. Almost all respondents (91%) said they manage their finances themselves, doing their own research, and obtaining advice from family, friends, the Internet, or a broker. The survey revealed that almost three out four respondents (71%) have been thinking more about their finances in the last three years. But only 20% thought they were very prepared for retirement. Others were uncertain about their financial future, 81% were not sure their investments were earning as much as possible and 57% were not certain they knew how to minimize their taxes through proper planning.

The survey also revealed that even individuals who felt confident about their money management skills may have been off the mark. More than half of those who believed they were maximizing savings and earnings felt this way because they had personally researched their mutual funds, understood how much investment risk they should take, had a short-term savings plan or owned real estate. But almost 90% of the respondents lost money in the last six years because of quick decisions they made about financial matters without talking to a planner.

Why didn’t more of the investors consult one? Most sought out professional advice in special situations rather than as a matter of overall strategy. For example, respondents said they would contact a financial planner if they inherited money, wanted to plan for retirement, needed estate planning advice, wanted to rollover 401(k) or IRA funds or were confused by changing tax laws.

Tips for Your Asset Allocation

There is no one-asset allocation formula suitable for all investors. You must evaluate your risk tolerance, time horizon, and rate of return requirements in order to determine how you should allocate your portfolio among the various investment categories. Consider the following:

  • The idea behind asset allocation is that different investment categories are affected differently by economic events and market factors. Some asset classes move in opposite directions (negatively correlated) while others move in the same direction (positively correlated). By investing in different types of assets, it is hoped that when one asset declines in value, other assets will increase in value.
  • Investments with higher return potential generally have higher risk and more volatility. While most investors want higher returns, they may be uncomfortable assuming higher risk levels. Asset allocation enables you to combine more aggressive investments with less aggressive ones. The combination can help reduce the overall risk in your portfolio.
  • Not only should you diversify across broad investment categories, such as equities, bonds, and money market funds, you should also diversify within the category of equities. For instance consider large-capitalization stocks, small-capitalization stocks, value stocks, growth stocks, and international stocks.
  • Determining your risk tolerance is one of the most important components of asset allocation. You are determining your emotional ability to stay with an investment when the returns are less than expected. The last two years should serve as a good framework for that assessment.
  • The longer your time horizon, the more aggressive you portfolio can be. Those with a time horizon of less than five years should not be invested heavily in equities. Look at bonds and money market funds for your short term needs. As your time horizon increases, you should have a higher percentage of equities in your portfolio.
  • Have reasonable return expectations. Basing your portfolio on a rate of return too high may cause you to increase the risk in your portfolio.
  • Rebalance your portfolio at least annually, if warranted. With time, your asset allocation percentages will change from your desired percentage as a result of varying rates of return for your different investments.
  • Be patient. The results of an investment program are best evaluated over a period of years, not days, weeks, or months.