Most Investors want to grow the value of their investment portfolio as much as possible. However, as you approach retirement, you might shift your thinking. The proper allocation for your investment will change over the course of your life. When you’re 50 years old, you are much closer to retirement than you were in your 20 s, and your investment allocation should reflect that. However, there is no “one- size- fits- all” way to diversify a portfolio, regardless of your age.
When you invest your money, you need to decide how to proportion{allocate} it between risky, growth- oriented (such as stocks) whose value fluctuates , and more stable, income -producing investments (like bonds). But while allocating your investments, you should take into account your own personal needs, experience and personality i.e. risk taking capacity. How soon you’ll need the money and how tolerant you are of risk are two important determinants when deciding how to allocate your money.
Risk Tolerance : –
This factor is particularly true if you’re already retired or you are in the age of 50- 55 years. In this case you’re close enough to retirement and you don’t have time to recover from a massive market sell- off. To protect your retirement nest egg , at age 50 you should consider shifting at least part of your portfolio from riskier investments like stocks to more stable option, like bonds and CDs. Your asset allocation between stocks and bonds depends on your risk tolerance. Are you risk averse, moderate or risk loving?.
Investments And Allocation : –
One general rule of thumb when it come to portfolio allocation is to subtract your age from 100. The resulting number is approximate percentage you should allocate to stocks. For example, at age 50 you should allocate 50 percent( 100-50= 50)in equities whereas ,at age 70, this is approximately 30 percent (100-70=30). This will be further modified depending on your investment objective and risk tolerance.
Your asset allocation also depends on the importance of your specific market portfolio. For example, most would treat their 401(K) or IRA as a vital part of their retirement strategy because it is or will become their largest portfolio.
Sticking With Your Allocation : –
Your goals and desire to take risk should drive the allocation of your investment dollars. As you get older, gradually scaling back on the riskiness (and therefore, growth potential and volatility) of your portfolio makes sense. But don’t play or tinker with your portfolio daily, weekly ,monthly or even annually as a practice. Don’t engage in Trading. Jumping on to a “winner” and dumping a “loser” may provide some short- term psychological comfort, but in the long- term, such an investment strategy often produces below -average returns. The closer you get to retirement, the more you’ll want to protect your funds, generally by shifting to more conservative allocation. In addition to funding your lifestyle with current income, you’re also reducing the number of years in retirement that you’ll need your saving to last. All of these factors should play a role in determining your allocation from age 50.
Various Asset Allocation Models : –
There are many asset allocation Models which have been developed by the financial experts. No one model can be recommended for all the investors as their objectives, goals, risk tolerance and personality differ. Some of these models are : –
(i) Conventional allocation model.
(ii) New Life allocation model
(iii) Survival Allocation Model
(iv) Nothing to lose allocation Model
(v) Financial Samurai Model of Investment
These models cater to the need of various spectrum of individuals having different age, priorities, funds requirements, time horizon and risk tolerance. One of these models i.e. Conventional Model of Asset Allocation is explained below. This model is suitable for the individuals who:-
— Believe in conventional wisdom and don’t want to over complicate things.
— Expect to live to the median age of 78 for men and 82 for women
— Are not interested in the stock market, bond market or economics and would rather have someone manage their money instead.
Proper Asset Allocation of Stocks & Bonds
Age Stocks Bonds
up to 25 100 % 0 %
30 70 % 30 %
35 65 % 35 %
40 60 % 40 %
50 50 % 50 %
60 40 % 60 %
70 30 % 70 %
75 + 25 % 75 %
Whereas, New life Asset Allocation model recommends an investment of 70% and 30% in stocks and bonds respectively for the personnel in the age of 50 years against 50: 50 given above.
CONCLUSION: —
Ideally, your asset allocation should let you sleep well at night and wake up every morning with vigor. When it comes to investing, you need to calculate your existing investment exposure and invest accordingly. Don’t let anybody force you into an uncomfortable situation. But take a proactive approach to your retirement portfolio and don’t be shy of taking moderate risk with your investments even at this age. Take the following into consideration while allocating your assets : –
(i) What is your risk tolerance on a scale of 0- 10?
(ii) How stable is your primary income source?
(iii) How many income streams do you have ?
(iv) What is your money strength ?
(v) What is your knowledge about stocks and bonds ?
(vi) How long is your investment horizon ?