Balancing a Retirement Portfolio with Asset Allocation

Balancing a portfolio is nothing more than regular maintenance for your investments—like going to the doctor for a checkup or changing the oil in your vehicle. The balance between growth, income, safety and stability is called your asset allocation, which helps to manage the level and type of risk you face. Balancing how much of each asset class to include in your retirement portfolio is one of your most important tasks as an investor.

 

Ideally, you should strive for an overall combination of investments that take the least amount of risk in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk.

 

Someone who is close to retirement and beginning to rely on his or her savings for living expenses will probably need a different asset allocation than a young, working professional with the priority of saving for retirement that is years away. The level of risk you are able to take is known as your "risk tolerance" and it's affected by factors such as how soon you'll use your savings in addition to your emotional and financial ability to handle setbacks.

 

Don't forget about the impact of inflation on your retirement savings. As time goes by, your money will probably buy less and less unless your portfolio keeps pace with the inflation rate. Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.

 

In addition to thinking about how to divide your assets among stocks, bonds and cash, consider how your assets are allocated within an asset class. For example, for the stock portion of your portfolio, allocate a certain amount to a mutual fund that invests in large-cap stocks, and a different percentage to one that focuses on stocks of smaller companies. You also might allocate based on geography, putting some money in U.S. stocks and some in those of companies overseas.

 

Bond funds will vary based on the underlying bonds they hold and they are subject to the same inflation, interest-rate and credit risks associated with them. Those differences will affect a fund's yield and volatility. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund's performance.

 

Cash alternatives, such as a money market fund, can be used to park money until you decide how to invest it. Once you've covered the basic three asset classes, there may be others that can further diversify.

 

There are various approaches to choosing an asset allocation that makes sense for you. One approach is to look at what you're investing for and the time frame you have to reach each goal. Those goals get balanced against your immediate need for money—for example, to pay living expenses. The more secure your immediate income and the longer you have to pursue your investing goals, the more aggressively you might be able to invest for them.

 

If you worry that you might need to tap your investments in an emergency, you'll need to balance that fact against your longer-term goals. In addition to establishing an emergency fund, which would lower the odds of your needing to tap your retirement account prematurely, you may need to invest more conservatively than you might otherwise want to.

 

Your asset allocation should balance your financial goals with your emotional needs. If the way your money is invested keeps you awake at night, you may need to rethink your investing goals and whether the strategy you're pursuing is worth the anxiety.

 

Even if you've chosen an appropriate asset allocation, market forces may quickly begin to alter it without any action on your part. Because of this, it’s important to review your portfolio periodically to see if you need to return to your original allocation.

 

Additionally, your asset allocation should take into account any significant life changes. Even if your asset allocation was right for you in the beginning, it may not be right for you now. It should change as your circumstances do. Reviewing your portfolio at least once a year can help to ensure that you’re on the right track.

 

Whether you’re months or what feels like a millennia away from retirement, there are effective steps you can take now to reach financial readiness. Having a plan and knowing your steps puts your goal within reach.

 

For a partner committed to your retirement success, contact the Busey Wealth Management team to see how we can develop a strategy to help you meet your unique financial goals.