How does a financial advisor choose debt funds and equity funds for us?
"There are raters of stock and bond funds of which Morningstar's is the best. Standard and Poor's and Value line offer reports that aren't quite as good. If you are able to read and understand these reports yourself, you don't need a professional. Such help is necessary for people who are ""rank beginners"" in investments." A financial advisor is a service professional.  It is his/her job to do things for you that you could do for yourself, but you're either too busy to do it yourself (and you want to pay somebody else), or you'd rather not. Just like some people hire tax preparers, or maids, or people to change their oil, or re-roof their houses. Me, I choose to self-manage.  I get some advise from Fidelity and Vanguard.  But we hired somebody this year to re-roof our house and someone else to paint it.
"You're right, the asset allocation is one fundamental thing you want to get right in your portfolio.  I agree 110%.  If you really want to understand asset allocation, I suggest any and all of the following three books, all by the same author, William J. Bernstein. They are excellent – and yes I've read each.  From a theory perspective, and being about asset allocation specifically, the Intelligent Asset Allocator is a good choice.  Whereas, the next two books are more accessible and more complete, covering topics including investor psychology, history, financial products you can use to implement a strategy, etc.  Got the time? Read them all. I finished reading his latest book, The Investor's Manifesto, two weeks ago.  Here are some choice quotes from Chapter 3, ""The Nature of the Portfolio"", that address some of the points you've asked about.  All emphasis below is mine. Page 74: The good news is [the asset allocation   process] is not really that hard:  The   investor only makes two important   decisions: Page 76: Rather, younger investors should own a   higher portion of stocks because they   have the ability to apply their   regular savings to the markets at   depressed prices.  More precisely,   young investors possess more ""human capital"" than financial capital;   that is, their total future earnings   dwarf their savings and investments.    From a financial perspective, human   capital looks like a bond whose   coupons escalate with inflation.      Page 78: The most important asset allocation   decision is the overall stock/bind   mix; start with age = bond allocation   rule of thumb. [i.e. because the younger you are, you already have bond-like income from anticipated employment earnings; the older you get, the less bond-like income you have in your future, so buy more bonds in your portfolio.] He also mentions adjusting that with respect to one's risk tolerance.  If you can't take the ups-and-downs of the market, adjust the stock portion down (up to 20% less); if you can stomach the risk without a problem, adjust the stock portion up (up to 20% more). Page 86: [in reference to a specific example where two assets that zig and zag are   purchased in a 50/50 split and adjusted back to targets]     This process, called ""rebalancing,""   provides the investor with an   automatic buy-low/sell-high bias that over the long run usually –   but not always – improves returns. Page 87: The essence of portfolio construction   is the combination of asset classes   that move in different directions at   least some of the time. Finally, this gem on pages 88 and 89: Is there a way of scientifically picking the very best future   allocation, which offers the maximum   return for the minimum risk?  No, but   people still try.   [...   continues with description of   Markowitz's ""mean-variance analysis""   technique...]   It took   investment professionals quite a while   to realize that limitation of   mean-variance analysis, and other   ""black box"" techniques for allocating   assets. I could go on quoting relevant pieces ... he even goes into much detail on constructing an asset allocation suitable for a large portfolio containing a variety of different stock asset classes, but I suggest you read the book :-)" The most obvious example would be a situation where a Company is growth constrained, but cash flow positive. It may have enough cash flow to service $10 million of debt, but it needs to build a new facility that will cost $20 million. There is the option to raise debt and equity or just raise equity and move quicker to getting that facility up and running.   There are also situations where debt is used to replace equity (i.e. dividend recapitalization or leveraged share redemption). The US Treasury is not directly/transactionally involved, but can affect the junk bond market by issuing new bonds when rates rise. Since US bonds are considered completely safe, changes in yield will affect low quality debt. For example, if rates rose to levels like 1980, a 12% treasury bond would drive the prices of junk bonds issued today dramatically lower. Another price factor is likelihood of default. Companies with junk credit ratings have lousy balance sheets, so negative economic conditions or tight short term debt markets can result in default for many of these companies. Whether bonds in a fund are new issues or purchased on the secondary market isn't something that is very relevant to the individual investor. The current interest rate environment is factored into the market already via prices of bonds. Sorry, I got even more confused. I assumed IC referred to equity only. At least under English accounting practice it's the norm to refer only to equity investment as capital in that context. The debt is listed as both an asset (cash or whatever asset the cash has been put towards) and a liability, cancelling it out. That being the case, the number would be the same, no? "You're missing the point here. The goal of ratings firms is **not** to accurately price debt. That's the market's job. The goal of ratings companies is to evaluate the ability of the company to service their debt instrument, much like how the goal of a public accounting firm is to assure that a company's financial statements follow GAAP.  The article implicitly makes the assertion that Aaa rated securities have pretty low default rates; it's mainly only the area of CDO backed securities that there's a large disconnect between the rating and default risk. While this does raise questions about the worthiness of these ratings and the way they went about modeling and rationalizing them, it hardly suggests that they are ""wrong over 50% of the time.""  As a side note, why not make it against the law for mutual funds to have rules that allow them to only hold Aaa rated securities? These funds that demand high credit ratings are only contributing to the conflict of interest by essentially ""asking for it.""" Some qualitative factors to consider when deciding whether to finance with equity vs debt (for a publicly traded company):    1) The case for equity: Is the stock trading high relative to what management believes is its intrinsic value? If so, raising equity may be attractive since management would be raising a lot of $$$, but the downside is you give up future earnings since you are diluting current ownership  2) The case for debt: What is the expected return for the project in which the raised capital will be utilized for? Is its expected return higher than the interest payments (in % terms)? If so raising debt would be more attractive than raising equity since current ownership would not be diluted  That's all I can think of off the top of my head right now, I'm sure there are a few more qualitative factors to consider but I think these two are the most intuitive In my original question, I  was wondering if there was a mathematical convention to help in deciding on whether an equity offering OR debt offering would be a better choice. I should have clarified better in the question, I used Vs. which may have made it unclear. On reading couple of articles & some research over internet, I got to know about diversified investment where one should invest 70% in equity related & rest 30% in debt related funds Yes that is about right. Although the recommendation keeps varying a bit. However your first investment should not aim for diversification. Putting small amounts in multiple mutual funds may create paper work and tracking issues. My suggestion would be to start with an Index EFT or Large cap. Then move to balanced funds and mid caps etc.  On this site we don't advise on specific funds. You can refer to moneycontrol.com or economictimes or quite a few other personal finance advisory sites to understand the top funds in the segments and decide on funds accordingly. PS: Rather than buying paper, buy it electronic, better you can now buy it as Demat. If you already have an Demat account it would be best to buy through it. "Technically, anyone who advises how you should spend or proportion your money is a financial adviser.  A person that does it for money is a Financial Advisor (difference in spelling). Financial Advisors are people that basically build, manage, or advise on your portfolio.  They have a little more institutional knowledge on how/where to invest, given your goals, since they do it on a daily basis. They may know a little more than you since, they deal with many different assets: stocks, ETFs, mutual funds, bonds, insurances (home/health/life), REITs, options, futures, LEAPS, etc. There is risk in everything you do, which is why what they propose is generally according to the risk-level you want to assume.  Since you're younger, your risk level could be a little higher, as you approach retirement, your risk level will be lower.  Risk level should be associated with how likely you're able to reacquire your assets if you lose it all as well as, your likelihood to enjoy the fruits from your investments. Financial Advisors are great, however, be careful about them.  Some are payed on commissions, which are given money for investing in packages that they support.  Basically, they could get paid $$ for putting you in a losing situation.  Also be careful because some announce that they are fee-based - these advisers often receive fees as well as commissions.  Basically, associate the term ""commission"" with ""conflict-of-interest"", so you want a fee-only Advisor, which isn't persuaded to steer you wrong. Another thing worth noting is that some trading companies (like e*trade) has financial services that may be free, depending how much money you have with them.  Generally, $50K is on the lower end to get a Financial Advisors.  There has been corruption in the past, where Financial Advisors are only given a limited number of accounts to manage, that means they took the lower-valued ones and basically ran them into the ground, so they could get newer ones from the lot that were hopefully worth more - the larger their portfolio, the more $$ they could make (higher fees or more commissions) and subjectively less work (less accounts to have to deal with), that's subjective, since the spread of the wealth was accross many markets." "The term ""stock"" here refers to a static number as contrasted to flows, e.g. population vs. population growth. Stock, in this context, is not at all related to an equity instrument.  Yes, annual refinance costs, interest rate payments etc. are what we should be looking at when assessing debt burden. Those are flows. That was my point when cautioning against naive debt GDP comparisons.  Also, keep in mind that by borrowing in it's sovereign currency, the US has an enormous amount of monetary tools to handle the debt if it ever became a problem. Greece, by comparison, is at the mercy of the ECB, so they only have fiscal levers to pull. The interest expense does not strike me as especially concerning, but I'd be happy to verify BIS or IMF reports if you would like." "Most articles on investing recommend that investors that are just starting out to invest in index stock or bonds funds.  This is the easiest way to get rolling and limit risk by investing in bonds and stocks, and not either one of the asset classes alone.   When you start to look deeper into investing there are so many options: Small Cap, Large Cap, technical analysis, fundamental analysis, option strategies, and on and on.  This can end up being a full time job or chewing into a lot of personal time.  It is a great challenge to learn various investment strategies frankly for the average person that works full time it is a huge effort.  I would recommend also reading ""The Intelligent Asset Allocator"" to get a wider perspective on how asset allocation can help grow a portfolio and reduce risk.  This book covers a simple process." International means from all over the world. In the U.S. A Foreign Equity fund would be non-US stocks.  There's an odd third choice I'm aware of, a fund of US companies that derive their sales from overseas, primarily. Life Strategy funds are more appropriate if you want to maintain a specific allocation between stocks and bonds that doesn't automatically adjustment like the Target Retirement funds which have a specific date.  Thus, it may make more sense to take whichever Life Strategy fund seems the most appropriate and ride with it for a while unless you know when you plan to retire and access those funds. In theory, you could use Vanguard's Total Market funds,i.e. Total Stock Market, Total International, and Total Bond, and have your own allocations between stocks and bonds be managed pretty easily and don't forget that the fees can come in a couple of flavors as betterment doesn't specify where the transaction fees for buying the ETFs are coming out just as something to consider. "You need to hope that a fund exists targeting the particular market segment you are interested in. For example, searching for ""cloud computing ETF"" throws up one result. You'd then need to read all the details of how it invests to figure out if that really matches up with what you want - there'll always be various trade-offs the fund manager has to make. For example, with this fund, one warning is that this ETF makes allocations to larger firms that are involved in the   cloud computing space but derive the majority of their revenues from   other operations Bear in mind that today's stock prices might have already priced in a lot of future growth in the sector. So you might only make money if the sector exceeds that predicted growth level (and vice versa, if it grows, but not that fast, you could lose money). If the sector grows exactly as predicted, stock prices might stay flat, though you'd still make a bit of money if they pay dividends. Also, note that the expense ratios for specialist funds like this are often quite a bit higher than for ""general market"" funds. They are also likely to be traded less frequently, which will increase the ""bid-ask"" spread - i.e. the cost of buying into and getting out of these funds will be higher." "You quickly run into issues of what denotes ""similar"", and how to construct an appropriate index methodology. For example, do you group all CB arb funds together globally or separate them by country? Is long-bias equity long-short different to no-bias and variable-bias? Is a fund that concentrates on sovereign debt more like a macro fund or a fixed income fund? And so on. By definition, hedge funds try not to mimic their peers, with varying degrees of success.  Even if you get through that problem, how do you create the index? You may not be able to get return numbers for all the ""similar"" funds, and even if you do, how do you weight them? By AUM, or equal weight?  There are commercial indices out there (CSFB, Eurekahedge, Marhedge, Barclays, MSCI, etc) but there's no one accepted standard, and it's unlikely that there ever will be as a result. It's certainly interesting to look at your performance versus one of these indices, and many investors do monitor fund performance this way, but to demand strict benchmarking to one of them is a big ask..."