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Dave Ramsey discusses asset allocation theory, educational debt

Dave Ramsey
TV and radio host Dave Ramsey

Dear Dave: Can you explain the "asset allocation" theory when it comes to investing? — Matthew

Dear Matthew: The asset allocation theory is one touted by lots of people in the financial community. It's also a theory with which I disagree.

In short, the asset allocation theory means that you invest aggressively while you're young. Then as you get older, you move toward less aggressive funds. If you follow this theory to the letter, you're left pretty much with money markets and bonds by the time you're 65.

The reason I don't believe in this theory is simple. It doesn't work. If you live to age 65 and are in good health, there's a high statistical likelihood that you'll make it to 95. The average age of death for males in this country is now 76, but that includes infant mortality and teenage deaths. So, a healthy 65-year-old man in America can look at having another quarter century on earth. If you move your money to bonds and money markets at age 65, inflation is going to kick your tail. Your money will grow slower than it will devalue, and you'll have little purchasing power. That's the problem with the asset allocation methodology.

I advise investing in good, growth stock mutual funds that have strong track records of at least five to 10 years. Spread your money across four types of funds: growth, growth and income, aggressive growth and international. These groups provide diversification across risk, as well as a little splash overseas.

Dear Dave: My husband makes about $35,000 a year before taxes, and we have one child. We've also got a mortgage and $60,000 in student loan debt. About a year ago, my husband started work on a master's degree, because he thinks he wants to teach when he retires. He quit school after the baby was born, because he didn't think we could afford it any longer. I think he should finish the degree. Otherwise, he's just throwing away the $10,000 we've already got invested in the program. What do you think? — Amanda

Dear Amanda: You guys need to clean up the mess you've made before he goes after his master's degree. You might be able to justify it if the degree immediately raised his income, but you two can't afford to make investments in vague educational goals right now.

If you want to call it throwing the money away, then yeah, throw it away. But I'm not sure the money has been wasted. The classes he has already taken are complete and on record, so why can't he finish the degree somewhere down the road? You guys have done a poor job of planning, and now you need to climb out of a big hole before you do anything else.

The point is not the $10,000, Amanda. The point is that you're barely making ends meet. You've already got a house payment and $60,000 in student loan debt hanging over your heads, not to mention the added expense of a baby in the house. The last thing you need is to go even deeper into debt for something he won't even use until retirement. That's just silly.

I'm all for education, but you've got to plan things and get a better payback on your educational spending. That's when it becomes an investment. But he doesn't need to even think about a master's degree until you guys have first straightened out your finances!

Dave Ramsey is America's trusted voice on money and business. He has authored five New York Times best-selling books:"Financial Peace," " More Than Enough, " " The Total Money Makeover, " " EntreLeadership " and " Smart Money Smart Kids. " The Dave Ramsey Show is heard by more than 8 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at