While finding the next Microsoft, Apple, or Gilead Sciences may be part of an investor’s retirement strategy, on a bigger picture level there is something much more important – proper asset allocation. Owning the proper mix of security types and risk managing your portfolio can lead to better returns and a safer path to financial security.
Since no investor is the same, there really is no wholesale blueprint for success when it comes to asset allocation. First and foremost as an investor you need to decide for yourself what your risk tolerance is. Next you need to assess how much risk you are willing to take to achieve end goals. Last but not least, you need to identify the mix of stocks, bonds, cash, real estate, and other assets that will help you sleep well at night.
It is certainly possible that two people living on Main Street USA may end up with two totally different investment programs. The thrifty saver who’s lived within their means and accumulated sufficient capital may be able to invest far less aggressively than someone else who’s spent most of every paycheck through the years.
The less aggressively you need to invest as you approach retirement, the better. Having the ability to own a conservative, balanced mix of assets including blue chip stocks, investment grade bonds, and some cash certainly trumps the need to see your portfolio significantly outperform the market on a price level on a year-in, year-out basis.
So what might a “conservative,” growth and income investment portfolio look like?
- 35% Blue chip stocks
- 15% Aggressive growth stocks
- 25% Investment grade bonds or income generating real estate
- 15% Aggressive bonds
- 10% Cash
While a more aggressive investment portfolio needing substantial capital appreciation may look something like this:
- 50% Aggressive growth stocks
- 20% Blue chip stocks
- 25% Bonds
- 5% Cash
There is no limit to what a portfolio could look like. Looking outside the publicly traded security realm, some people may prefer to invest in antiques, sports memorabilia, jewelry and precious gems/metals, or other types of collectibles. For those who’s livelihoods revolve around a certain business, everything may be vested in that endeavor.
But it is certainly risky to have all your eggs in one basket, whether it be a business, one stock, or even just one type of asset, even if you are diversified in that asset.
Risk is not always an easy concept to define however. Depending on the end investment goal there could be a variety of ways to perceive risk. For example, an investor with hefty capital may be more of a preservationist, viewing investment in any fluctuating value asset as risky. An investor with less capital in desperate need of portfolio growth may view it as risky to not be in stocks.
Bond investors may similarly view risk from disparate angles. The investor who views bonds as simply a safe stream of cash may be a stickler for credit quality, but may be willing to take on greater duration risk in search of higher yield. Another bond investor may highly sensitive to interim capital fluctuation and thus keep duration short, while being more willing to take on credit risk. Other investors, like yours truly, may seek to a more balanced approach, seeking out bonds with moderate levels of credit and duration risks.
In the end, the building of a retirement portfolio and proper diversification of assets is far from an exact science. It is, nonetheless, a science you must constantly seek to optimize in order to successfully balance your portfolio’s needs with the risks that you both need and are willing to take.
About the author: Adam Aloisi has over two decades of experience investing in equities, bonds, and real estate. He has worked as an analyst/journalist with SageOnline Inc., Multex.com, and Reuters and has been a contributor to Seeking Alpha for better than two years. He resides in Pennsylvania with his wife and two children. In his free time you may find him discussing politics, playing golf, browsing antique shops, or traveling.