Counting Online Business Wealth For Retirement

We all know how important asset allocation is when deciding where to put the money we have set aside for retirement.  When a person is young the majority of the funds should be in stocks, maybe 90%, because they have the biggest upside potential, but then as he or she gets older the percentage of wealth in stocks should decrease and percentage kept in safer investment vehicles, such as bonds, should increase.  The idea is the closer we get to retirement the less willing we are to gamble our money on gains versus losses.  For example, a person who is 50 may have 60% in bonds and only 40% in stocks.

Another determining factor in choosing an asset allocation is your risk tolerance.  If a person has 100% of their portfolio in stocks, and we have a 25% correction, then the value of their retirement fund just lost $25 for every $100 invested before the decline.  Had their assets been split evenly between stocks and bonds then he or she would have only experienced a 12.5% loss due to the stock market and probably would have seen an increase in the value of their bond holdings. Also, when a major correction occurs, the people who are heavily weighted to stocks are more likely to get scared and pull out completely because of the large short term percentage loss.  This locks in the loss with no hope of rebounding as future gains increase the value of stocks again.

What About Non-Traditional Assets?

The theory of asset allocation is very well known and is a corner stone of almost every financial retirement plan.  The downside to having a large portion of your assets in safe investment vehicles, of course, is that you have less up-side potential. Since conventional wisdom holds that the more you have in stocks over long periods of time, the better you will do, it is important to deftly walk the thin line between risk and reward.  One idea that is gaining more traction is to look at alternative asset classes to fill in the gaps.

An interesting point:  many experts argue a person should factor in Social Security payments on the bond side of your asset allocation.  While not everybody agrees, it does make a certain amount of sense.  Your Social Security benefits are an obligation to pay just like a bond is.  Thus, unless the federal government goes bankrupt (which is possible albeit unlikely) these funds will be paid out.  This means you can have more money allocated to stocks and still be prudent, giving you a larger upside potential from the equities.  In theory, at least.

Could this logic apply equally to passive income from an online business opportunity?  If you set up a business that provides a steady cash flow, then in effect you have a bond-like stream of income.  I am not talking about future earnings from an actively operated business (which entail plenty of risk) but more in terms of passive income streams like those from rental properties in the brick and mortar world.  The more income you have from alternative sources, the less you will eventually need from your portfolio, increasing your ability to take risk if not your need to do so (an important distinction).

There are many paths to Jerusalem, and many ways to diversify your portfolio than just with stocks, bonds, and cash.