What is asset allocation? How should you approach that while saving for retirement? What about during retirement? Deciding how to invest your assets is incredibly important. On this episode, I’m going to break down your diversification options and give you my take on how to best invest for a successful retirement!

 

You will want to hear this episode if you are interested in...

• What is asset allocation? [1:21]
• Deciding which asset allocations are right for you [3:16] 
• Asset allocation and your retirement time horizon [5:57]
• Exploring your risk tolerance [7:34]
• Steps needed to create a diversified asset allocation [12:17]

  The benefits of diversification

Asset allocation is the single greatest decision that an investor has to make with one of the largest impacts on your investment portfolio. If you Google asset allocation you’ll get a lot of different answers, but it boils down to this: dividing your assets among the various asset classes such as stocks, bonds, and cash to manage the risk in your portfolio. There are also additional options for asset allocation such as real estate or commodities. Diversity amongst your assets will help smooth out any declines. For example, your portfolio will take a minimum hit if the stock market declines while the commercial real estate market remains steady. Diversification helps to protect your portfolio when the markets inevitably fluctuate. 

While you definitely should diversify your portfolio, an issue we’ve encountered over the last several years is the high correlation between these asset classes. Meaning, when stocks go down so do the real estate market and commodities like gold and other precious metals. You don’t always see this happen, but it’s definitely something to keep an eye on when choosing how to allocate your assets.

  Keeping pace with inflation

There are several different ideas when it comes to how you should allocate your assets. A typical suggestion is to subtract your age from 100 and the remaining number is the percentage of your assets you should have invested in stocks. A major problem with this method is that it’s fairly inaccurate. It would have a 65-year-old investing only 35% of their portfolio into stocks. That puts too much weight into bonds and cash and doesn’t properly account for the rising rate of inflation. Increasing the number you subtract from to 110 or 120 does give you a better chance of combating inflation, but it still leans heavily on bonds. 

Investing in bonds has a certain amount of unpredictability involved. Bond returns are based on ever-fluctuating interest rates. As we know, current interest rates are at an all-time low so the likelihood of finding a CD with a good return is as well. In my research, I couldn’t find anything higher than 1.25%. If inflation is hanging out around 7%, investing a large number of assets in bonds will put you way behind the curve. For more information on how to allocate your assets, listen to this episode!

  Resources Mentioned

• Vanguard Investor Questionnaire
• The Investment Answer: Learn to Manage Your Money & Protect Your Financial Future (Book)
• Simple Wealth, Inevitable Wealth (Book)

  Connect With Morrissey Wealth Management 

www.MorrisseyWealthManagement.com/contact