If you’ve ever watched a movie that featured someone in finance, you’ve almost certainly heard that character say it’s important to “diversify your assets.” And it’s true – it’s important to make sure you have an investment strategy that ensures all of your eggs aren’t in one basket, so to speak.
But a smart investment allocation strategy isn’t just about being diversified. It’s about making sure that your funds are allocated in a way that’s aligned with your personal financial goals.
So what is an appropriate investment allocation? Well, that depends upon what you’re trying to accomplish and where you are in life. The right investment allocation will differ from person to person and family to family, but here are some common themes to consider based on your life stage:
Wealth Accumulation Mode
When you’re younger, your portfolio will likely be in a more growth-oriented investment allocation than it will be later on. This is typically the case because most people are investing over a longer time horizon since they won’t be constrained by the need to access that money imminently (i.e. retirement is not in the next 10 years).
This stage of your life is all about balancing competing priorities, namely saving and investing while paying down debt -- because you shouldn’t focus exclusively on a single goal at the expense of all others. Most people will be currently (or in the next 10 years) focused on some combination of student loans, a mortgage, and saving for their children’s education.
The reason it’s important to work towards multiple goals is that the sooner you get started, the more flexibility you will have. Plus, because your goals will evolve naturally over time, starting early will allow you to prepare for things before they happen. All too often, people will focus on repaying debt while not saving at all, or will maintain an undiversified investment portfolio where most or all of their money is correlated to a single risk. This is frequently the case for those with stock-based compensation, and steps can and should be taken to mitigate this concern.
Needing Liquidity
As your assets grow, you may soon find yourself in need of a large amount of cash to fund a major purchase or life event. The most obvious event that requires liquidity is buying a home, but this also pertains to situations where financing options are more limited (like a wedding), or occurrences where you might need an emergency fund.
With such a life event, you’ll need to have access to a considerable amount of money that can be quickly and easily accessible, but that should still be generating at least a modest-return to counteract the effects of inflation. Money backing these priorities is more likely to be in lower volatility investment vehicles and those where you won’t be penalized for removing money on short notice.
Approaching Retirement
If you’re in or approaching retirement within 10 years, your investment allocation needs will yet again change. During this phase of life, it’s important to carefully monitor portfolio risk since you aren’t focused on as long of a time horizon. Although your retirement will last a considerable period of time, in retirement you will be drawing upon your portfolios to cover living expenses and don’t want to be withdrawing large amounts of money in a down market and locking in losses.
Again, this is about balancing competing priorities as some amount of your portfolio will generate income to cover living expenses while other parts of your portfolio may still be invested in growth-oriented assets to reduce the risk of rising inflation.
Depending on your assets and how close you are to retirement, an advisor can help you determine the right way to structure your portfolio for retirement, which may include the following:
Growth and Income – As you approach retirement, you’ll still want to be growing your assets, but you’ll also need to ensure that you can start to use the proceeds from your investments to fund your current lifestyle.
Income-focused – During your retirement, you may transition to a portfolio primarily focused on generating income.
Capital preservation – Later in retirement, you’ll likely be focused on simply maintaining your assets and will be highly risk-averse.
Have Questions?
Navigating the appropriate investment allocation throughout these various phases of life can be challenging, but is essential to your financial wellness. A financial advisor can help ensure your portfolio is structured appropriately given your personal financial goals.
For a complimentary portfolio review, contact Paceline today.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.