The backbone of good investing is Asset Allocation, and today I am going to load you up with great information.
Terms needed to understand asset allocation:
Domestic Stocks = US Companies
Market Capitilization of US Stocks (According to Morningstar):
Large Cap = US Companies with a Market Cap greater than $11 Billion (these are the companies that are household names like Wal-mart, GE, Home Depot, Coca-Cola, Pfizer, and so forth)
Mid Cap = US Companies with a Market Cap between $2-$11 Billion (these are companies that you might have heard of like HR Block, but are not the size of the previous listed group.
Small Cap = US Companies with a Market Cap below $2 Billion. Probably not going to recognize the small company unless you specifically use their product or they are in your town.
For more financial terms, visit the show notes at http://www.moneyguy.com/2007/01/the-abcs-of-asset-allocation
Before we can look forward I think that it is smart to review what happened in 2006:
Domestic Stock Markets:
* The 2006 market was interesting in the fact that the first half was pretty flat as everyone tried to figure out what the Federal Reserve was going to do with interest rates.
* The second half was El Fuego (“ON FIRE” for my Spanish-challenged listeners). The Fed decided to take a break with interest rates, oil prices dropped, everybody and their brother decided it was a good time to merge with other businesses, corporate profits were better than anticipated, unemployment was lower than expected, and interest rates came down.
* All of this was the perfect mix of optimism and lower inflationairy news that allowed patient long-term investors to be rewarded.
* Actual numbers for 2006 (with dividends reinvested):
S&P 500 Gained 16%
Dow Jones Industrial Average returned 19% (at an all time high)
NASDAQ was up 10% (still more than 50% below 2000 levels)
For more information, visit the show notes at http://www.moneyguy.com/2007/01/what-to-learn-from-2006-and-use-in-2007