What You Need to Know About Asset Allocation

All right, let’s talk about asset allocation. What that really boils down to is diversification of your portfolio. And traditionally when you think about diversification and a lot of times it comes down to risk. As you get older, traditionally you want to take less risk with your overall portfolio. So that’s where asset allocation can become vital. So let’s walk through maybe five best practices for managing your asset allocation. So starting with the first, consider your age. What’s your retirement timeline? Also, sort of what’s your life expectancy? And so if you’re going to be under 50 years old, you might say okay, I may be comfortable taking more risk with my portfolio. You might have a heavier equity weighting versus bond weighting within your portfolio. Now when you get to say five to 10 years from retirement, all of a sudden you might say well, I’m going to reduce from a more aggressive strategy potentially, down to a more moderate risk exposure. And then you get into retirement or you’re getting in those later stages of life and you might say well, I really need to scale things back and invest more conservatively. Now again, this isn’t true for everyone. Everyone’s situation is unique. But that’s traditionally what you may observe. Meanwhile, number two is your risk tolerance. As I said, that’s going to be different for everyone, regardless of age. So you might be a bit younger and saying well, I don’t like the emotional stress that comes with the market and watching that do really well one day and not so well the next day and over time those rollercoaster rides aren’t your comfort zone. So again, it comes back to your personal risk tolerance. So that’s where you could use as a general rule, there’s been this rule of 100. Where you take 100 minus your age and that’s the percentage of the portfolio where you might say hey, I want to take greater risk. So that could be in stocks, as an example. So if you’re 60 years old, 100 minus 60, okay 40% of the portfolio, let’s say is in stocks. What we’ve noticed though is people are living longer. It’s almost become the rule of 110 and so you’re taking 110 and then subtracting your age and then that’s the percentage of the portfolio where you might say hey, I want to take risk. Number three, the stock market shouldn’t dictate your allocation strategies. Obviously, there’s a lot of day to day movement and there’s a lot of things going on whether it’s political unrest. There’s a lot of international with different wars that are happening and all of that, that comes into play that a lot of times people will use those current events and say well, I’m going to shift from one aggressive strategy over to cash and trying to ultimately time the market. Which we’ve learned over time, doesn’t pay off. So it’s important to follow up planned asset allocation strategy as you get to retirement and then also through retirement. Number four, diversify your holdings within each asset class. So within the stocks, you might have different exchange traded funds or ETFs for short. There might be different mutual funds that you would hold or potentially different individual stocks within your portfolio. You don’t want to rely on just one company or one sector of the market. You might for stocks, look in the value sector. such as different utility companies, consumer staples, health care. Then you’ve got the growth sector where you might find more of the technology or financial industries. So again, diversification on the equity side and you’ve of course got the bonds that would have different government, corporate, municipal bonds and different maturity dates for those bond holdings. Number five, insurance company account options. So that’s where you could look at there’s different fixed or fixed indexed or life insurance sometimes that includes long-term care. So that can be part of your asset allocation. But you do need to work with a licensed insurance agent. And it’s helpful to find one that can shop around and look at a lot of different companies versus just one insurance company. At Centennial Wealth Advisory, we’re set up as an independent firm where we can help you evaluate your risk and have those conversations of what your comfort level is with your portfolio and trying to define what that appropriate asset allocation is for you. We welcome you to give us a call and talk through that.