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Mix it Up: Why Asset Allocation is Important

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Let’s start working with our clients with a fresh approach to planning their financial life.

Don’t just focus on their finances, start with their goals: what they want to get out of life. Then, add a bit of reality and common sense to help them see what might be blocking their ability to reach their goals.

Then talk possible solutions, with the understanding that everyone’s unique and other factors may need to be taken into account so they may make decisions that fit with their overall financial picture.

Diversify. This means allocate their assets across the three major asset classes of stocks, bonds and fixed products and within each of those classes.

Next, practice asset allocation because it may have the greatest effect by far of anything you can help your clients do to manage risk and take good financial care of themselves. Look at it this way: It’s not putting all your eggs into one basket.

Next, make sure their mix of assets, how much they put where, is right for them. Their decisions should feel comfortable and be in keeping with their goals, their time horizon, how much risk they can tolerate and how much money they have “left” to work with. Of the money they have left, how much do they not want to have at risk so they can feel more confident about the money you do have at risk.

Finally, don’t get let them get too comfortable. At least once a year, review their allocations and make adjustments to make sure their assets are still allocated as they intended and they are still on target.

What stage of life are they at?

Now, regardless of what stage of life they are at, asset allocation is vitally important. In fact, it’s essential for any sound financial plan—whether you’re in your 20s, 40s or 60s.

Now if your client is a 20-something, he or she may be working at their first “real” job and starting off their career. They may be trying to pay off college loans, and beginning to pay ordinary living expenses, like food, rent and transportation costs.

They should begin to start investing for the future, so they can someday own a home, travel or fulfill some other lifelong dream they have. Ask them: What are your goals? And how much risk can they take with their money? During this stage of life, they definitely want to ask themselves: “What’s my goal?” and “What’s my tolerance for risk?” Once they have answered these questions, you’ll want to keep these strategies in mind for how they might finance their goals.

In their 40s or 50s they may find that there are many demands on their finances, such as juggling income, paying for their child’s college education, and perhaps buying a bigger home. Not to mention continuing their investment plan. So they’ll want to ask themselves:

  • What’s my goal?
  • What’s my risk tolerance?
  • When do I plan to retire?

As part of an asset allocation strategy, they may want to consider putting more into their long-term savings through a number of different accounts they may have already established, such as: an employer’s qualified plan, mutual funds, brokerage accounts, CDs, fixed products and bonds. They’ll want to pay particular attention to how much more they could allocate to stocks, since over time they have proven to offer the most growth potential. A conservative rule of thumb: Add a percent sign to their age, then put no more than the percentage of their money into fixed income investments like bonds, fixed assets or CDs. The rest can go into stocks.

When they turn 50 years old, they may get an incentive to save even more in certain retirement plans or IRAs through “catch-up” provisions. What this means is that if they have contributed the maximum amount the IRS generally permits and they are at least age 50, the IRS allows them to increase their contribution by a specific dollar amount for that year.

In their 60s, they are likely to be primarily concerned about their future financial security once they stop working, making sure they have adequate health-care coverage, and perhaps even ensuring a legacy for their heirs. At this stage, they’ll want to ask themselves:

  • What’s my goal?
  • What’s my risk tolerance?
  • When do I plan to retire?

Am I financially prepared for retirement?

The best approach to asset allocation is to take the minimum amount of risk necessary for them to reach their investment objective.

Asset allocation can be a powerful tool that helps clients build the portfolio that’s right for them. One of the single most important investment decisions they’ll ever make is how they divide their dollars among different asset types.

The point is, allocate their assets. How they allocate is up to their personal preferences and risks, their years to retirement, their goals and how much they already have in the way of income and savings.

Whatever the makeup of their portfolio allocation, it can change over the years, just like hairlines and waistlines. Fortunately, an out-of-shape portfolio is much easier to fix.

That’s why it’s a good idea to periodically review their portfolio to make sure their asset allocation remains in balance.

Just remember that it’s important to re-evaluate their plans at every stage of their life. Let’s face it, a lot happens between the time they turn 25 years old and the time they reach 55.

As you reassess their plans with them each year, ask them the following questions:

  • What are your goals?
  • What’s your tolerance for risk?
  • When do you plan to retire?
  • Will you be financially prepared?

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