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Not shopping while hungry and having a list is your plan to keep you from overspending while grocery shopping. Your work’s disaster drill keeps you safely headed in the right direction in case of a fire. You also need a plan to keep your retirement growing over time and that plan is having the right mix of stocks and bonds (a.k.a., asset allocation) and sticking with it in good times and bad. You worked hard for your retirement savings so here’s your plan to help your retirement funds work just as hard for you:
Get the Mix Right. As we discussed in our “It’s Personal” issue, your mix of stocks and bonds in your portfolio should be unique to you. “Swings” in your portfolio should solicit a manageable emotional reaction and not cause you to sell an investment at a low point or take on more risk by chasing returns. It should consider your personal risk tolerance and timeframe for using the funds. Using a general rule of thumb to solve for your mix ignores an above or below average appetite for risk or the possible need to tap into the investments, and it doesn’t shed light on how to diversify among different types of stocks and bonds. You owe it to yourself to avoid this mediocre rule, so talk to your employer’s 401k plan advisor or your financial advisor to develop an allocation that’s made just for you.
Stick With Your Mix. Over the past 20 years, the average asset allocation investor has significantly underperformed in both the stock and bond markets and has barely kept pace with inflation. Why? Not sticking to a plan. We’re not saying that your mix won’t change over time — it will and it should. What we are saying is that changes should be made when your situation changes and not because of an emotional reaction to the market. Get the right plan in place, then see it through for as long as it continues to be right for you. A custom asset allocation you stick with in good times and bad is key to making your investments work as hard as you did to create them.
If you don’t have a financial advisor and need some guidance, contact us. The $enses are here to help.