Adjusting Your Asset Allocation over Time

Understanding the importance of asset allocation is critical if you are going to be a successful investor over the long-term. Asset allocation is not something that you are going to leave the same forever. Typically, you want to change it as you get older. Here are a few things to consider about adjusting your asset allocation over time.

Asset Allocation

The asset allocation of your portfolio is the percentage of your money that is invested in each type of investment. For example, you might have an asset allocation of 60 percent stocks and 40 percent bonds. Choosing the individual investments is important part of investing. However, it is also just as important to have the proper asset allocation for your investment objectives.

Starting Out

When you are a new investor, you are most likely going to want to take on some risk. By taking on higher levels of risk, you are going to be able to get larger returns. This means that you are most likely going to want to put a large percentage of your money into stocks. Stocks have the greatest potential for growth of any of the traditional forms of investment. In order to make money in the stock market, you will need to invest with long-term goals in mind. Historically, the value of the stock market has always increased over the long-term. Therefore, if you are young, you need to put a good portion of your funds into the stock market so that you can benefit from the long-term capital gains.

Transition

As you get a little bit older, you may need to change the allocation of your portfolio. Since you do not have as much time to make up for mistakes, you need to invest a portion of your money into other things besides stocks. You might want to put a little bit more money into bonds or mutual funds. For example, you may decide to have an asset allocation of 60 percent stocks, 20 percent bonds, and 20 percent mutual funds. 

Getting Close to Retirement

When you get close to retirement, you need to be a little bit more careful with your investment portfolio. No longer can you afford to take on the large amounts of risk that you had when you were younger. You are going to be depending on the money to live in only a few short years. Because of this, you may want to transition into a larger percentage of bonds in your portfolio. This is going to provide you with regular interest payments without having to risk your capital as much as you do with stocks.

How to Transition

In order to reallocate your portfolio, you will simply need to sell the security that you want to lower the percentage of and buy more of the other. For example, sell shares of your stock and use the money to buy bonds.

Impact

When you reduce the risk of your portfolio over time, you are also going to reduce the potential for gains. However, at this point in your life, gains are not as important as steady income.

 

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