Last Week’s Question of the Week: What year were IRA’s first introduced? ANSWER: They were first introduced back in 1974.
HOST: When retirement is finally in focus, what tips can you offer towards properly allocating my portfolio?
KLAAS FINANCIAL: Yes, this is a very important. Once we determine WHEN is the best time to retire, we really want to make sure that we don’t get this part wrong.
We all want to enjoy a comfortable, financially secure retirement. But saving for the future isn’t enough; you need to develop an ideal asset allocation strategy so that your investments allow you to achieve your long-term goals.
This means ensuring that your portfolio should probably contain a healthy mix of stocks, bonds, and even some cash.
Your strategy will depend on a number of factors, including your anticipated retirement length and tolerance for risk.
What will your asset mix look like? Stocks, which are more volatile than other investments but have historically delivered the highest returns. Bonds, which are a less risky, income-producing investment that typically offer higher returns than cash but lower returns than stocks. Cash, which is generally a risk-free investment but offers little in the way of returns, especially in today’s interest rate environment.
In your retirement plan at work, you may have an option of selecting a Target Fund which may help you choose the appropriate balance of an asset mix.
HOST: So how much do I need to keep in stocks in my portfolio?
KLAAS FINANCIAL: One idea that some people suggest is that assuming you’re still looking to grow your savings over the next five to 10 years, and you have an average appetite for risk, you can take your age, subtract it from 110, and use that number to determine how much of your portfolio ought to remain in stocks. For example, if you’re 60 years old, it means that 50% of your assets should be invested in stocks. You might split the other 50% between bonds (40%) and cash (10%), or whatever other percentages best meet your needs.
There is no single correct stock-bonds ratio that’s right for all people, but we would suggest that it needs to provide for enough long-term growth (especially for a possible long retirement), while also affording at least some downside protection. Normally we would see people limit stock holdings to 40-60% of their portfolio. Diversification is KEY.
There is no such thing as a one-size-fits-all approach to asset allocation. That’s why you’ll need to consider your retirement timeline, risk tolerance, and goals when establishing your personal strategy.
Make sure to adjust that strategy once retirement actually begins. Your portfolio should never be something you set and forget, and the more you keep tabs on it, the better your investments are likely to serve you in the long run.
Also, remember what Warren Buffet once said. “Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”
HOST: Some people ask why should they even keep bonds in their portfolio these days with the low returns they are seeing?
KLAAS FINANCIAL: Yes, that is a common question we hear these days.
The most important reason to continue to hold bonds is that, rising rates or no, bonds still fulfill what for long-term investors is their most important function: They act as a barricade against the volatility of the stock market.
In general, bonds tend to do well when stocks do poorly. In 2008, for example, when the Standard & Poor’s 500 index dropped 37%, the Bloomberg Barclays U.S. Aggregate Bond Index gained 5.2%.
If you hold a diversified portfolio of bonds that includes both government and investment-grade corporate issues with a broad range of maturities, the potential bond losses aren’t likely to be anything close to the downdrafts of 50% or more that stock investors have had to endure in past bear markets.
HOST: So, should I change my asset allocation change as I approach retirement?
KLAAS FINANCIAL: So, when retirement is near your goal leading up to retirement should be to continue growing your assets without taking on too much risk — the reason being that the likelihood is you will be needing access to your investments relatively soon, and you don’t want to run into a situation where your portfolio value takes a major dive just as you’re about to dip in.
Ideal strategy for you:
- It depends on your tolerance for risk. Though most pre-retirees are advised to start shifting their assets into safer investments, like bonds, if you happen to have a higher-than-average appetite for risk, you might maintain a more stock-heavy portfolio.
- The same holds true if you have a solid backup plan for generating retirement income, such as a pension or perhaps a side business you plan to focus on once you leave your full-time career behind. This way, if your investments take a hit early on in retirement, you can leave them in place to recover and sustain yourself with the income your venture produces.
- Another factor that will influence your pre-retirement asset allocation strategy is the extent to which you need to keep accumulating wealth. If, for example, you’re 60 years old and have already amassed enough savings to meet your long-term needs, then you might shift heavily away from stocks. After all, there’s no point in putting your portfolio at risk if you don’t need more money than you currently have.
HOST: You have some reminders for us?
KLAAS FINANCIAL: Yes, know your risk tolerance, in terms of your personality, your expected rate of return, your time horizon, and your required liquidity. And then:
- Set your goals
- Create your plan
- Choose your asset mix
- Choose your investments
- Track your progress consistently
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.
