As you progress through your retirement investing journey, consider altering your asset allocation by age as your time horizon, investment goals, and risk tolerance change.
Don’t put all your eggs in one basket. This timeless comment, passed down for generations, is a classic phrase when it comes to investing. Whether you’re just starting your investing journey, enjoying retirement, or at any point in between, having the right mix of investments (known as “asset allocation”) can help you weather the market’s ups and downs and pursue your goals.
But how many baskets should you have, and how many eggs should be in each basket? In other words, how do you determine the appropriate asset allocation? What factors should you consider? To determine an appropriate allocation, consider the following:
- Time horizon. When do you plan to use the money in your portfolio?
- Goals. What are you investing for (first home, children’s education, retirement)?
- Investment objective. Are you looking more for growth or income?
- Risk tolerance. Will market fluctuations stress you out?
- Current and future income sources. Are you working or retired?
Asset allocation by age and investor type
Considering these things can help you decide if you’re an aggressive, moderate, or conservative investor. Your investment identity can influence the way you allocate your portfolio among stocks, bonds, cash, and other investments.
Some recommend portfolio asset allocation by age, under the assumption that the younger you are, the more aggressive you should be with your retirement asset allocation. That may be true to some degree, but some investors are naturally more conservative than others. Plus, some retirees might not be focused primarily on income in retirement but rather plan to pass their assets along to their heirs. Such retirees might want to be more aggressive.
With these caveats in mind, look at the asset allocation by age chart table below to see a general comparison among investor types.
Asset allocation by age chart
| Aggressive investor | Moderate investor | Conservative investor | |
|---|---|---|---|
| Risk tolerance | High | Moderate | Low |
| Investment objective | Aggressive growth | Moderate growth | High income and some growth |
| Time horizon | 15+ years | Around 10 years | 3 – 5 years |
| Sample asset allocation | 95% stocks, 5% cash | 60% stocks, 35% bonds, 5% cash | 20% stocks, 50% bonds, 30% cash |
Staples of asset allocation
Many investors split their portfolios between stocks, bonds, and cash because it’s one way to balance growth and risk versus income and safety. Over the long term, stocks have historically provided growth. However, in exchange for this potential growth, investors assume risks that go well beyond the risks of fixed income investments like bonds.
Having bonds in your portfolio may help reduce risk. The primary reason, generally, is that bonds provide diversification, income, and (in most markets) less volatility compared to stocks. That’s because bonds are designed to provide regular income, which can reduce risk; price appreciation is a secondary consideration.
Keep in mind, all investments involve risk, which is often defined by investors as volatility drops in price up to and including the loss of principal invested.
Don’t set it and forget it
Allocating your portfolio among different investments shouldn’t be a one-and-done activity. Asset allocation is about finding the blend of investments that works for the current stage of your financial journey. For example, younger and middle-aged investors may have a higher allocation in stocks because they may have goals with longer time horizons, such as saving for retirement. Retirees may tend to have more in cash, bonds, and fixed income investments because they want to reduce risk and may need income to help meet daily expenses.
But you don’t necessarily have to allocate assets strictly by age. After a major life event occurs, such as the birth of a child or a career change, it can be important to review your asset allocation to make sure it aligns with new goals and investment objectives. If it doesn’t, you may want to reallocate your portfolio (shift assets around) to help you stay on track. You may also have other goals, such as saving for a child’s college education, that may have shorter time horizons.
The financial markets are another reason to keep an eye on your asset allocation. Market fluctuations can cause your portfolio to become more aggressive or conservative than you intended. For example, perhaps your portfolio has shifted from 60% stocks and 40% bonds to 65% and 35%, respectively. This shift is fine if you’re comfortable with the new weighting and it meets your needs. Otherwise, you may want to rebalance your portfolio, so it reflects your target allocation.
Time well spent
With so many things competing for your attention, it’s easy to put off reviewing your investments. Don’t put it off any longer. Log in to your Schwab account and check out the tools and resources available to help you review your portfolio.
A portfolio asset allocation that fits your goals, time horizon, and—if appropriate—age is key to your financial well-being now and in the future.
