Sorry to be a buzzkill, but the essence of successful investing pretty much comes down to bookkeeping. Skilful selection of stocks and funds is certainly important, but it’s just as crucial to set the right mix of investments for your needs and then adjust it as time goes by.
The investment industry uses the term asset allocation to describe the process of blending the three main asset classes – stocks, bonds and cash. See my last blog post for some guidelines on how to create the right combination for your needs. Give your mix some serious thought, but don’t obsess. It’s a well-kept secret of the investment industry that there is no categorically correct blueprint for a particular investor. In fact, you could ask six investment industry pros to suggest an ideal asset mix for an investor and easily get six different answers.
One thing everyone agrees on is that you must get more conservative in your asset mix as you get older. Every five years or so, think about ratcheting down the risk level of your portfolio. In practical terms, that would mean moving some of your stock market exposure into bonds and cash. Your evolving mix of assets in a registered retirement savings plan account might look something like this:
|Age||% in Stocks||% in Bonds & Cash|
The older you get, the more you’ll want to shift the emphasis in your portfolio away from growing your money to protecting it. Stocks are for growth, while bonds and cash are for preserving what you have. Cash is also handy if the stock market falls and you want to capitalize on the bargains that emerge.
Why not get out of the stock market altogether when you get close to retirement? Because you may need to keep at least a small part of your investments growing, even as you’re drawing on your money to pay your expenses. This is an important consideration at a time when more and more people are living to age 90 and longer.
I’ve kept things pretty simple here in discussing asset allocation. In my next post, we’ll kick things up a notch and look in more detail at the building blocks you’ll need for both the stock and bond sides of your portfolio.