Financial Advisor for asset allocation in mutual funds:
1. Small Cap Funds: 25%
2. Medium Cap Funds: 25%
3. Large Cap Funds: 25%
4. International Funds: 25%
The reason for this is because when the stock market goes up over a long period, all types of mutual funds will follow the same direction. By having the same percentage in each type of fund will ensure that you are at least in the top four of the major broad types of mutual funds.
At the end of every year if the stock market ends in a positive percentage, then one of these four types will finish 1st, 2nd, 3rd and 4th. This is really the best common sense approach to investing when you think about it.
All equity mutual funds follow the same direction of the stock market.
Mutual funds such as money market funds or bonds funds are used when the stock market goes down over a long period. This is because they do not have stocks of companies in them and which is why they are considered stable investments in a down market.
To find out when the stock market is going up or down is to look at the chart of the S&P 500 Index. This Index is considered the market leader for the overall stock market because it covers only the biggest companies in every industry.
Below is the last 10 years of the stock market. Green line is the 1 year average which is the average price over the past 12 months.
S&P 500 Index - month to month over 10 years
Notice the key cross point for stock market collapses
The stock market can not begin a long decline unless it goes below its 1 year average first and it can not begin a long upward climb until it goes above its 1 year average first.
It is the only way to understand the stock market trend. The stock market is considered normal when it is above its average price over the past 12 months because this means the market as a whole is no longer dropping.
Always view the stock market chart with the month to month price instead of the day to day price because this will eliminate all the zig zags you see in a chart. A pattern forms as you can see and it is like watching a movie in slow motion.
