Asset Allocation: Part 4 of 5
By Colleen Mulder-Seward, MBA
This article is the fourth in a series about asset allocation. In our last article, we learned about the different asset categories. In this article you will determine your ideal asset mix.
As mentioned in an earlier newsletter, asset allocation of yesteryear used to be simple. The formula was to subtract your age from 100. This resulted in the percentage of your portfolio you should have invested in stocks. For example: a 65-year-old would have 35% in stocks and 65% in bonds and cash. But, due to longer life expectancies, people run the risk that their investments will not grow fast enough to last their lifetime, when following this formula. Reading this series of articles and using the retirement calculator available at www.retirementcalc.com can help prevent this from happening to you.
In order to find your ideal mix, you should complete one of the short questionnaires located at the URLs below:
Fidelity's Asset Allocation Planner
MFS.com’s Asset Allocation Planner
Either questionnaire will result in an asset allocation strategy that should suit your individual needs. The examples below are possible results from the completing a questionnaire. The Fidelity questionnaire results are on the left and MFS.com results are on the right.
Once you have your ideal mix identified, you can plug these percentages into the retirement calculator. This will help to identify if there is any shortfall with your current plan. If there is a shortfall, you can plan to work longer, take a smaller annual withdrawal amount and/or increase your savings rate. Again, you can plug these “what if” scenarios into the retirement calculator until you no longer have an investment shortfall. Your asset allocation plan is done, for now.
Just because this is your ideal asset allocation mix today, does not mean it will work for you for the rest of your life. You should evaluate your mix after each life event (i.e. marriage, divorce, birth of a child, retirement, etc.) or at least every five years.
In our next newsletter,you will learn when and how to rebalance your portfolio.