Why is asset allocation important? Basically you are dedicated to a specific breakdown of financial sectors that you may or may not have knowledge what the breakdown should be. The possibilities are endless when it comes to the asset breakdown for your retirement accounts. Finding the right asset allocation is crucial to how your investing performs.
But it all comes down:
- What you want to invest in
- How much Risk you wish to take
- Why your age may favor a specific breakdown
- How comfortable you are with making adjustments
For years many investment gurus preached that the younger you are the higher your percentage of funds should be in U.S. Stock sector but now I think that is not the right way to invest. The volatility now a days is getting way to out of control for even the professionals to grasp.
What can you do to put yourself in the best possible path for your funds? Understand the importance of doing asset allocations based on you’re percentages and fund prices. (If you are into spreadsheets and tracking prices you will benefit from the ups and downs of the market)
When I say for you to make these allocations, I am referring to your 401K or similar plan which may include IRA plans as well. The reason I say this is because these types for accounts usually do not charge you fees for making moves / shifts between funds. Now let’s discuss the % breakdowns by age range.
Asset Allocation by Age:
20-30s: 70% U.S. Total Stock Fund, 15% International Fund, 15% Bond Fund
40-50s: 50% U.S. Total Stock Fund, 30% Bond Fund, 20% International Fund
60-70s: 40%U.S. Total Stock Fund, 40% Bond Fund, 20% International Fund
Clearly as you get older you want to start to move the risk away in retirement accounts by reducing your % in the U.S. equity markets and moving it to bonds, income producing assets, and cash. This will assure you will be better protected if there is a dramatic market collapse like in 2008. These diversification tactics coupled with the lower costing index funds like Vanguard funds you will have a greater chance of hitting your retirement magic number sooner than later.
Then you can be preoccupied with what to wear to the beach because you have just reached the financially free stage of your life. Now the fun begins.
Asset allocation definition as per Investopedia
Rich Uncle EL
