By: C Garrett Moore, CFP®, ChFC®
A successful retirement is frequently at the top of people's financial wish lists. One key component of a successful retirement plan is your "asset allocation". Today, I will explain exactly what asset allocation is, and then we will delve into the importance of proper asset allocation and how it can significantly impact your retirement savings.
Understanding Asset Allocation
Asset allocation refers to how you divide your portfolio among various asset classes such as stocks, bonds, cash, and even gold or real estate . The goal with proper asset allocation is to create a portfolio that strikes the balance between the low risk you likely want, and the return you need to make your retirement viable. A well-thought-out asset allocation strategy can help mitigate risk and maximize returns over the long term, while helping you to afford to live the life that you want in retirement.
The Impact of Asset Allocation
Imagine a scenario where your retirement account is heavily concentrated in just one asset class. That would be a lot like focusing solely on only one aspect of your own life. Solely your wife. Solely your kids. Solely your job. Obviously, that's a bad idea, your portfolio is no different.
If you're only invested in one asset class, and that asset class underperforms over time or experiences a sharp and pro-longed downturn, your retirement savings and lifestyle will almost assuredly suffer. Conversely, if your portfolio is well balanced amongst multiple asset classes, they can work together in unison to help cushion the impact of market fluctuations and economic downturns, providing more stability, potential growth opportunities, and ultimately more retirement security.
Further, research tells us that your asset allocation is the number one determinant of the growth rate of your portfolio!
The Bucket Strategy
Sometimes, people find it helpful to use the bucket strategy. The bucket strategy is the exercise of earmarking certain portions of your money for now, soon, and later. With this strategy, you ensure that the "now" money is very stable and accessible, such as cash and certain bonds. That way, you don't have to worry so much about market fluctuations affecting the money you need imminently. On the other hand, you can position your "later" bucket for more growth, while resting easier knowing that your "now" bucket is in place and that you have plenty of time to let the natural ups and downs of investing play out within your "later" bucket.
Monitoring and Rebalancing
Asset allocation is not a one-time decision because investments are constantly in flux, and so is your life. As a result, it is very important to regularly monitor your portfolio for variations that have caused your asset allocation to fall off target. If and when it has, "rebalancing" is the act of buying and selling certain investments to bring your portfolio back where you want it and where it needs to be.
Consult a Financial Advisor
Navigating the world of retirement account asset allocation can be challenging, and mistakes can be very hard to recover from when you're already retired, which is why seeking guidance from an advisor could be a prudent decision. An advisor that's worth their salt can assess your complete financial picture, get to know your investment preferences and retirement goals, and then create an asset allocation strategy that is most likely to result in success as you define it!
If you'd like to chat about your asset allocation or anything else, please reach out below or call me at 941.544.2269.