When you’re investing, where you choose to allocate your assets could have a significant impact on your long-term returns. But it’s not something you do just once. “Taking stock” of your investments and rebalancing them regularly is almost as critical as where you invest them in the first place. This is the art of asset allocation by age.
Give your portfolio some class
Asset allocation is the percentage of money you direct into each of the major asset classes – stocks, bonds and cash accounts. Stocks can be divided into sub-asset classes such as large cap, mid cap and small cap, and domestic and international, to name a few. Not to be outdone, bonds have sub-asset classes too, including long-term government bonds and corporate bonds.1 Each asset class has a different level of investment risk. Stocks generally have higher risk with higher potential returns. Cash accounts have the lowest risk and returns, and bonds are somewhere in between. How you divide your retirement savings among them – your asset allocation – determines your risk and return potential even more directly than the individual investments you choose.2
Historically, stocks have offered higher returns than bonds over long periods of time. So if a typical investor with 30 years or more before retirement is looking for the most growth potential, it would not be uncommon to have an asset allocation of 90% stocks and 10% bonds. However, if a typical investor was nearing retirement, it might make sense to limit risk with an asset allocation of 60% stocks, 30% bonds and 10% cash3.
Over time some asset classes will perform well and others will lag behind. Let’s say stocks perform better than bonds, and your 90/10 allocation becomes 95/5. That’s when you need to rebalance to get back to your original percentages.
Keeping your balance
In general, it’s a good idea to rebalance your portfolio at least once a year. When you rebalance, you’re selling your higher-priced investments and buying more of your lower priced ones. Why does this make sense? For starters, you’re sticking to the old adage of buy low, sell high.
If this sounds like a headache to you, check out some of the employer retirement plans and Individual Retirement Accounts (IRAs) that offer automatic rebalancing. This makes it easier to stay on track. Target date funds also offer automatic rebalancing as part of their simple, hands-off approach.
Stick to your guns
Choose an asset allocation that aligns with your long-term goals and keep it steady by rebalancing regularly. As your needs and risk tolerance change, make tweaks as needed to stay in control. And as always, a Voya Financial Advisors retirement consultant will be happy to help you along the way.
1Stocks are more volatile than bonds, and portfolios with a higher concentration of stocks are more likely to experience greater fluctuations in value than portfolios with a higher concentration in bonds. Foreign stocks and small and midcap stocks may be more volatile than large cap stocks. Investing in bonds also entails credit risk and interest rate risk. Generally investors with longer timeframes can consider assuming more risk in their investment portfolio.
2Asset allocation and rebalancing do not ensure a profit or protect against loss in a declining market.
3These allocation examples are hypothetical and are not meant as investment advice. Your allocation needs may be very different and are based on your goals, time horizon and risk tolerance.
This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. We recommend that you consult an independent legal or financial advisor for specific advice about your individual situation.
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