If you are a typical working adult, thinking about your financial situation and retirement needs to involve the idea of asset allocation. Asset allocation is simply how you break up your money in terms of what percentage of your capital goes into each asset class. A basic tenant for retirement is the longer you have to go before retirement, the more time you have for your capital to grow. As such, you can allocate more capital to riskier assets with the idea they will grow quicker, and produce higher returns than assets which are considered safer. In addition, with a long period of time involved, riskier assets have more time to recover in the event a specific asset class has a down period.
The main asset class advisors use when thinking about higher risk and higher returns would be equities, or stocks. Stocks typically do have higher returns than any other asset class, especially over a longer period of time, say 10 years. Stocks do not always outperform other classes, and during the period from 2000-2010, stocks have had their worst return in many decades, essentially flat for 10 years. Historically, however, stocks do have the best returns for a long period of time. As such, I believe stocks offer the best way for people to grow their capital.
From an asset allocation perspective, a typical model for any investor is to think about one’s age and use it as a guide for asset allocation. I think anybody ages 21-40 should use an asset allocation model which looks something like this:
Asset Allocation- Ages 21-40
Bonds (Fixed Income) – 20%
Certificates of Deposits- 5%
Notice the low percentage of bonds in the younger person’s asset allocation model. As one gets older, the percentage of fixed income as an asset class will increase, and the percentage of equities should decrease. Also, other assets might be included for diversification purposes. For example, for investors ages 45-60, the asset allocation model might look something like this:
Asset Allocation: Ages 45-60
Naturally, each person has their own objectives, constraints, time horizon, tax situation, and unique circumstances they should consider when trying to create an asset allocation model. Usually, these models will be created in conjunction with an investment policy statement. As always, it is best to work with a financial advisor to formulate these documents to help implement and stick to a specific investment strategy pertinent to each specific individual. Thanks for reading and good luck with your investment strategy.
Yale Bock is the President of Y H & C Investments, a Registered Investment Advisor based in Las Vegas, NV. My educational background is a B.A. in Economics from UC-Irvine, a MBA from UC-Irvine, and have earned the right to use the Chartered Financial Analyst designation. I have been managing clients money for about 5 years and my own money for over 15 years and I can be followed at www.wealthfront.com or www.covestor.com