What Should My Asset Allocation Be?
The biggest question in investing is “Where should I invest my money?” Investors often wonder whether they should invest entirely in stocks, bonds, or a balanced mix of both. Aggressive allocations tend to be all stocks, while conservative allocations tend to be all bonds and cash. Having an asset allocation strategy in place provides discipline and guidelines for investors.
Asset Allocation Strategy & Investment Objectives
Having a disciplined asset allocation strategy allows one to stay focused on meeting their investment objectives. Right or wrong, emotion always makes way into investing; however, having the right asset allocation will remind you of your investment objectives.
How to Set Your Asset Allocation
The simple answer to what your asset allocation should be is: the one you are comfortable with and understand to reach your investment goals. Here at Geier Asset Management, we cater your asset allocation to align with your time horizon, investment goals, and risk tolerance. Specifically, before we invest your hard earned capital, we examine your entire financial profile to ensure we are investing to align with you and your family’s goals. It is for this reason that we do not believe in a “cookie cutter” approach to investing.
If your current investments keep you up at night, and you are constantly worried about the direction of your account, it is likely that you are not allocated correctly. A financial planner’s job is to help you match your current situation and time horizon to an allocation that will help yield the highest probability of success in attaining your financial goals. For example, with a younger investor who has several decades of earning ahead, it makes sense to plan for her retirement by having a higher allocation to stocks than any other kind of investment. Our logic in this instance is that over time, we believe stocks outperform bonds and bonds outperform cash. It is for this reason that retirees should consider a more moderate allocation, whereas a younger investor just starting in their career can consider being aggressive.
The Risk of Holding Too Much Cash
Another concept that we consider when implementing your asset allocation is that over time, one of the biggest risks to any asset allocation is holding too much cash. Yes, cash should be kept to maximize buying opportunities; however, it is important to understand that sitting in cash may cause a significant loss of purchasing power if used as a long-term investment because of inflation.
The Most Significant Determinant to Asset Allocation
A simple example of this is comparing gas prices in the 1980s to gas prices in 2000s. The most significant determinant to asset allocation is your time horizon because time is an investor’s best friend. The more time you have, the more risk and reward opportunities available. This is also why your asset allocation must be flexible and change as you get closer to your investment goal. It is our job to identify how to adjust your asset allocation and manage risk.