Thursday, January 28, 2010

Allocating your assets throughout your life

The following is a guide to help you determine how to allocation can be done for your portfolio based on your stage in life. This is only a guide; your portfolio may look quite different because of your circumstances, risk tolerance, or other factors.

The reason for this gradual shift away from stocks is that, as you age, you have less time to make up losses you may incur in stocks. If you go through a bear market in your 30s, you got decades to recoup your losses, and chances are good that you will come out way ahead in the long run. But a bear market in your 50s or 60s can seriously damage your nest egg and may even derail your retirement plan.

The percentage of each investment type changes as you get older. Notice that stocks should constitute a healthy chunk of your investments even in retirement. There are 2 reasons for this:

- Because you can expect to live longer in retirement that your grandparents did, you need to have at least some growth in your portfolio to stay ahead of inflation.

- Stocks and bonds tend to move in opposite directions, so even when you are retired, you want to hedge your bets against low bond yields when stocks are setting new record highs.

If you are married and counting on only one retirement plan to see you through your post-work life, you are still putting all your eggs in one basket. Divorce, illness, or death can leave on of you with little or no income. Each of you needs your own retirement plan for financial stability.

The most important thing is to avoid putting all your eggs into one basket. Even if you are in your youth and retirement is decades away, you will still need some cash and bonds in your portfolio to counter the risk you take in stocks. REITs can be there to help protect you against the effect of inflation which can significantly devalue your cash and bonds.

Being too conservative with your investments is as risky to your long-term financial health as being too aggressive. If you take too much risk, you could lose most or all of your savings. But if you are too conservative, your savings become vulnerable to inflation, and between inflation and taxes, you risk dooming yourself to a lower standard of living in retirement.

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