Asset Allocation: Growth and Preservation

When investing for retirement, one of the most important decisions you'll make isn't about picking the "perfect" stock, bond, or mutual fund. It's about how you divide your money across different investments. This process is called asset allocation, and it's the backbone of a successful long-term investment strategy.

Why? Because how much you put into stocks, bonds, and cash will ultimately determine both the risk you take on and the growth you can expect. It's about building a portfolio that aligns with your goals - and your tolerance for risk.

Why Asset Allocation Matters

Think of asset allocation as the foundation that supports everything else in your financial plan. You could spend hours researching the best-performing stocks or the safest bonds, but how you allocate your assets across different types of assets may have an even bigger impact. Here's why: stocks, bonds, and cash don't move in the same direction at the same time. Stocks can skyrocket, bonds might stay steady, and cash, well, it's safe but rarely grows faster than the general rate of inflation.

Spreading your investments across these asset classes helps you balance risk and return. Stocks provide the potential for higher returns, but they're also volatile. Bonds offer stability, but their growth potential is limited. Cash? It's there for security but doesn't do much for long-term growth. The magic is in how you blend them. As you get closer to retirement, you'll likely shift your allocation from aggressive (more stocks) to conservative (more bonds and cash). It's about protecting your nest egg while still giving it room to grow.

Building a Portfolio by Decade

Like risk tolerance, there's no one-size-fits-all formula for asset allocation. Your needs change over time, so your strategy should evolve with you. Here's a snapshot of how your portfolio might look at different stages of your life.

Please note that everyone's financial situation is different, and there is no definitive answer to the best way to allocate your investments. The outline below represents what may be appropriate for many investors, but not your unique situation. Please contact a qualified professional for personalized advice on how to allocate your assets to meet your financial goals.

Your 20s: Emphasizing Growth

Retirement feels like a distant dream in your 20s, right? That distance is your greatest ally. You've got decades ahead, which means you can afford to take on more risk to maximize growth. At this stage, you might allocate 90% or more of your portfolio to stocks, with the remaining in bonds or cash.

Why so heavy on stocks? Simple - historically, stocks have outperformed other investments over the long haul. Sure, they're volatile and past performance is no guarantee of future results, but when you have decades to ride out the ups and downs, that volatility becomes less of a concern. And starting early lets you tap into the power of compounding - the secret sauce of wealth-building. In addition to your original investment, your gains begin to make money, too. And over time, the returns snowball.

Your 30s: Building on a Solid Foundation

Life has probably gotten more complicated by the time you hit your 30s. You may be buying a house, starting a family, or moving up in your career. You've got more responsibilities, but growth should still be your focus.

A portfolio for your 30s might still be 70% to 80% stocks, with 15% to 25% in bonds and a small percentage in cash. The increased bond allocation adds a layer of stability, which can be comforting as your financial obligations grow.

This decade is also the time to consider diversifying within your asset classes. Maybe you add some international stocks or split your bond investments between government and corporate bonds. Diversification helps spread your risk and increases your chances of earning consistent returns over time.

Your 40s: Shifting Toward Balance

In your 40s, retirement no longer feels like such a distant concept. You're beginning to see it on the horizon. This decade may be the time to strike a balance between growth and preservation. A typical portfolio in your 40s might consist of 60% to 70% stocks, 25% to 35% bonds, and 5% to 10% cash.

You're still pursuing growth but now layering in more protection. The slight shift toward bonds and cash reflects the growing need to preserve what you've accumulated. It's also an excellent time to reassess your financial goals. Are you on track for the retirement lifestyle you envisioned? Should you adjust your retirement age or savings goals?

Around this time, rebalancing becomes a serious consideration. As markets move, some assets will grow faster than others, and your portfolio could become unbalanced. Regular rebalancing ensures that your portfolio stays aligned with your target allocation and risk level.

Your 50s: Preparing for the Transition

As you enter your 50s, the homestretch is in sight. Retirement is no longer a far-off idea; it's right around the corner. For many at this age, asset allocation should focus on capital preservation (while still aiming for enough growth to last through retirement). A typical portfolio in your 50s might be 50% to 60% stocks, 35% to 40% bonds, and 5% to 10% cash.

At this stage, you're dialing down the risk. A significant market downturn could be tough to recover from, so lowering stock exposure is likely a smart move. But you can't eliminate risk entirely. People are living longer, and your portfolio still needs growth to outpace inflation and ensure your savings last (see longevity risk below).

Your 60s: Finalizing Your Retirement Portfolio

By your 60s, retirement is either happening or about to happen. The focus now shifts almost entirely to preserving your capital and generating income. A typical portfolio at this stage might consist of 40% to 50% stocks, 40% to 50% bonds, and 10% cash. Remember, "stocks" isn't a single category of risk. For example, some stocks offer lower risk and higher dividend payments.

At this point, your balance between stocks and bonds should reflect your retirement plans. For example, if you expect your savings to last for several decades, you might hold on to a slightly higher allocation of stocks.

It's also wise to have a cash cushion - enough cash or cash equivalents (like money market funds) to cover a few years of living expenses without being forced to sell investments during a down market. This buffer protects your portfolio from being depleted too quickly during tough times.

Beyond 70: Managing Longevity Risk

In your 70s, your focus shifts to managing longevity risk - the risk that you'll outlive your savings. A portfolio for this stage might include 30% to 40% stocks, 50% to 60% bonds, and 10% to 20% cash.

Bonds and income-generating investments are crucial at this stage for stability, but many retirees don't abandon stocks entirely. You may still need some growth to protect against inflation, which can erode your purchasing power over time.

Adjusting Your Portfolio Over Time

Your asset allocation isn't static - it should evolve with you. As your goals, risk tolerance, and time horizon change, so should your strategy. Regular reviews and adjustments keep your portfolio aligned with your financial objectives.

Rebalancing is key to keeping your portfolio in check. As markets fluctuate, some assets will grow faster than others, throwing your allocation off balance. Rebalancing brings it back in line, ensuring you stay on track.

Life changes - whether in employment, health, or family - can also impact your financial needs. Be ready to adjust your strategy as needed.

The Takeaway

Asset allocation is the cornerstone of any solid investment strategy. Whether you're just starting out in your 20s or managing wealth in your 70s, the right asset allocation is one that grows and evolves with you.

Making asset allocation decisions can be complex. If you need help, please get in touch with a financial professional for personalized advice.