By Jean Kozlowski New York, August 3, 1998 (Standard & Poor's)
How you allocate your retirement savings among stocks, bonds and money market instruments is one of the most important decisions you'll make regarding your retirement savings plan. But an investment mix that suited you when you were 25 and single may not be appropriate when you turn 40 or 50. Major changes in your personal life, financial situation, and time horizon can make your current investment mix obsolete. Here are some good and not-so-good reasons for changing your asset allocation.
Good Reasons
A Financial Windfall or Setback If you come into a large sum of money from an inheritance, the sale of an asset or another source, your overall financial situation may change so dramatically that your current asset allocation is no longer suitable. With the addition of this new money, you may not need to invest as aggressively to achieve your financial goals. Or you may regard this windfall as a safety net, enabling you to assume more risks within your plan in search of potentially greater rewards.
The loss of a large sum of money outside your plan is also justification for rethinking your asset allocation. If your time horizon allows, you may choose to invest more aggressively in your plan in order to make up for the assets you've lost. Or you may be so concerned about preserving your assets that you decide to invest more conservatively.
Change in Your Time Horizon As you progress through your career, you should periodically reevaluate your willingness to bear risk, keeping in mind that you have less time to recover from a market setback. Generally speaking, as your time frame shrinks, it's usually a good idea to shift your emphasis from volatile, growth-oriented investments to more stable ones.
If you're going to need your money soon, say within the next three to five years, shifting a significant portion of it into less volatile investments may be a prudent move. Money market or stable value options tend to provide lower average returns than stocks or bonds over long periods of time. But these options can add stability to your portfolio, and stability may be of paramount importance if your time frame is short.
New Goals If you decide to retire early, take a trip around the world or indulge in exotic hobbies, you'll probably need more money, and therefore you may wish to consider investing more aggressively. On the other hand, if your retirement plans now call for a simpler life, a more conservative investment posture might be appropriate.
Life Event Changes Marriage, divorce, death of a spouse, or the birth of a child might cause you to rethink your asset allocation. If you marry and your spouse participates in a retirement savings plan, you may wish to adjust your allocations to maximize both plans best features. However, if your spouse does not work outside the home, your plan must provide for both of you in retirement, which may mean investing more aggressively. If you lose a spouse (and therefore your spouse's plan), your plan must reflect your new situation. The birth of a child means more responsibilities and more ways to spend your money. Raising a child and saving for a college education may force you to put aside less money for retirement than you would otherwise like. You may wish to consider investing more aggressively in an attempt to make up for your lower savings rate.
Not-So-Good Reasons
Short-term Performance Your retirement savings plan is a long-term investment vehicle. Don't change your asset allocation simply because one investment performed poorly in the last quarter, or even the last few quarters. And don't chase last quarter's hot performer; it may cool off in the next quarter. If you need the long-term growth potential that stocks can provide, or the stability of bonds, then stay with your allocation until your individual situation requires a change. Don't let outside forces derail a well-thought-out plan.
Because Your Friend Did This is probably the worst reason to deviate from your plan. Your asset allocation should reflect your financial goals and risk tolerance. Any financial planning decisions (asset allocation, investment choices, etc.) should be made by you with your objectives in mind. Remember, if a change suggested by a friend doesn't work out, you're the one who pays the price.
03-Aug-1998 11:30:23 (01357256) Copyright 1998 Standard & Poor's Investment Advisory Services, Inc. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without prior written consent from Standard & Poor's. For permission call 1-212-770-4639.
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