Stock Investing Myth: Asset Allocation is Based on Your Age…

What really matters in determining the correct asset allocation mix for your portfolio boils down to three key factors, namely:

1. Your investment time horizon, which is influenced by your age to retirement plus the number of years expected in retirement. It is better to plan to have your retirement funds last in the event of a long life expectancy rather than outlasting your funds because you invested in too many fixed-income investments.

Keep in mind that the longer your time horizon, the better the odds are that stocks will significantly outperform bonds or cash as investments. Over 20-year rolling periods from 1927 to 2009, stocks have experienced an average return of 909 percent compared to bonds with only 247 percent.

2. Your expected return on your overall investment portfolio, which affects how much you will have throughout retirement. You must plan for both capital preservation and appreciation of your portfolio, especially if you are faced with being in retirement for 30 or 40 years.

This will mean having a higher percentage of your capital invested in the stock market even during retirement. Doing so allows you to continue to grow your nest egg and/ or reduce the drawdown of your capital.

3. Your cash flow needs, to cover your living expenses and future needs well into your 80’s. Investing in the stock market provides you with the opportunity to generate the cash flow that you will require to sustain your lifestyle well into the future.

Basing your asset allocation primarily on an age formula can spell disaster for you in the future. Failing to plan for enough growth in your investment portfolio to cover the effects of inflation that will erode your nest egg over several decades could radically change your lifestyle for the worse.

No one cookie cutter formula is going to necessarily fit your particular needs when it comes to your financial future. You are much better off in analyzing your individual situation in the context of the above seven factors to arrive at an appropriate asset allocation mix.

Here’s to your ongoing success as an investor.

Disclaimer: Any information shared on Stock Investing Simplified does not constitute financial advice. Stock Investing Simplified is not a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities readers or customers should buy or sell for themselves. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser.

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