What is the Right Asset Allocation for You? Consider These 4 Guidelines

By Ryan Martin & Lauren Hunt, Senior Advisors

What is the right percentage of stocks, bonds, and other investments I should have in my investment portfolio?

This is one of the most important questions each investor has – one we often hear, especially from people worried about any short-term drop in their portfolio’s value during periods of market volatility. Each person has different needs and objectives, so our answers will vary.  Yet the fundamental goal is generally the same — to build a diversified portfolio that can grow steadily with a reasonable amount of risk to generate and sustain wealth to meet your financial objectives.

To accomplish that goal, many people choose an investment portfolio consisting of some percentage of growth-oriented holdings (stocks and alternative investments) and some percentage of holdings meant to preserve capital (cash and bonds). The stocks will often include large-, mid- and small-cap US companies, as well as international companies, while the bonds may consist of short- to intermediate-term corporate, municipal, and government bonds.

Each person’s allocation decision should be based on their individual circumstances, but there are a few basic principles that anyone can apply. Here they are:

1. Choose an Allocation for Good and Bad Times

Deciding on the right allocation of stocks, bonds, and other investments — and staying with this mix through thick and thin — means you are less likely to make decisions based on emotions when things go wrong. While a fairly evenly weighted portfolio (½ stocks and ½ bonds) will often provide for meaningful growth over a long period, there will probably be difficult years where your investments lose money. You may begin to question your mix of stocks and bonds during the tough times, but it’s critically important to stay the course in response to a short-term drop in your portfolio’s value.

The Standard & Poor’s 500 Index dropped 20.6 percent in the first six months of 2022. But the index also rose by a stunning 18.5 percent average annual rate of return during the previous five years, providing people with a significant increase in their wealth. Understand that the market is always moving; even if it’s in the wrong direction now, keep your long-term objectives as the goal.

2. Determine How Much Growth is Needed to Retire Comfortably

Whether it’s a comfortable retirement income, a vacation home, or an annual European vacation, a financial plan is needed to meet these objectives. That’s where an individual strategy comes into play.

A person who started investing later in life may need to take on more risk to achieve their goals. For example, if they would like to retire with $5 million at age 65, and have only $2 million at age 50, they may need to allocate a higher percentage of money into stocks unless they are able to save substantially more money.

On the other hand, someone with more than enough wealth to meet their objectives may not need such risk and doesn’t want to see their portfolio vacillate up and down.  While they may accept a lower rate of return as a tradeoff for less risk, they can do so based on their resources.  Going one step further, retirees with no concern about outliving their wealth may want to revise the allocation in their portfolio to leave more money for their heirs. For example, at age 80, if their portfolio is 60 percent stocks and 40 percent bonds, they may actually want to change their investment mix to generate higher returns. While this usually means taking on more risk, there may be little downside, as they may be able to live comfortably despite the outcomes. The objective is to generate more growth that can be passed on to their adult children and grandchildren.

3. Choose The Right Amount of Risk to Maximize Your Returns

In theory, you should be compensated for taking more risk with higher potential returns.  But how much risk are you willing to endure?  Because stocks often provide the highest returns over a long period, a person in their 30s or 40s will likely have more of their investments in stocks than the typical portfolio and they can accept a riskier mix of assets.

While some young investors have recently watched their investments drop in value, they shouldn’t be too concerned; they will have two or three decades to recover. They’ve also been presented with an unusual opportunity: buying many stocks at a discount to their value, enabling them to reap the rewards from any new investment in the years to come.

No matter what your age, it’s important to feel at ease with a certain level of volatility. One simple scenario to consider during the decision-making process is how did you react during the last downturn in the market?  Did this cause unrest, or did you pay little attention to the fluctuations and headlines?

4. Occasionally Change Your Allocation – But Not Often

People approaching retirement who are on track to meet their retirement goals will likely want to make some changes within their portfolio to take on less risk. After building wealth for decades, now is the time to protect assets.

At the same time, however, pre- and early retirees should maintain a portfolio that isn’t too conservative. Their investments should continue to outpace inflation – realizing that the current inflation rate is unusually high.

No matter your situation, plan to have enough money to last a lifetime. Even if you retire at age 65, understand that your money will possibly need to last for the next 25-35 years, depending on your circumstances.

We generally caution against making allocation changes at presumably inopportune times – avoid getting more conservative after markets have dropped (selling stocks after a pullback) and getting more aggressive after a bull market run (getting greedy and buying more stocks after a period of good performance).

Have Questions?

If you have questions or need to discuss your investment strategy, feel free to contact us. We offer a free consultation to discuss how a comprehensive financial plan can enable your business and personal wealth to grow.

Reach out to the authors for a free consultation:

rmartin@monetagroup.com or lhunt@monetagroup.com

© 2022 Moneta Group Investment Advisors, LLC is an SEC registered investment advisor and wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Index and/or Style returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. You cannot invest directly in an index. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

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