In the financial planning world, the role of age and risk tolerance bears heavily on how a Certified Financial Planner™ might recommend you allocate your assets and diversify your portfolio.
Ideally, you should plan to reduce the overall risk level of your investments as you get closer to the age you plan to retire. The challenge for most investors is determining how much of their portfolio should be allocated to which types of investments in order to minimize their risk.
Asset and Risk Allocation in Financial Planning
Asset allocation refers to the mix of stocks, bonds and other investment vehicles in a given portfolio. As some types of investments carry a larger risk, asset allocation is a way to also apportion the level of risk a portfolio carries.
Economic theory — as well as some well-known research — suggests that asset allocation is the key to investment success. By diversifying the assets in your portfolio in a specific way, you have a much better chance of achieving your financial objectives.
Allocating your assets astutely is also the most effective way to avoid devastating losses as you approach retirement age.
The “100 Minus Your Age” Formula in Financial Planning
For many years, financial planning logic recommended that your portfolio be structured based on a formula of 100 minus your age.
In other words, if you were 55 years old, your portfolio should be allocated such that 45 percent was invested in riskier vehicles (i.e., stocks), with the balance invested in safer investments or assets, such as bonds or money markets.
Today, however, this formula may have changed somewhat, depending on the investor. As Americans are living longer, the need for retirement funds extends for many years beyond what it did when the “100 minus your age” formula was developed.
Depending on your personal appetite for risk, the number may be closer to 110, 115 or even 120 minus your age.
A Certified Financial Planner™ Can Help
Despite this and other formula-based methods of personal investment management, no one-size-fits-all answer exists to advise you how to allocate your risk.
When the financial markets collapsed in 2008, many investors lost almost everything — even those who had allocated much of their portfolio to low-risk investments. An entire generation of Americans was forced to delay their retirement for several years while they recovered from their losses.
The lessons learned from that experience can help older investors avoid a similar experience, should the markets falter again. However, having a Certified Financial Planner™ (CFP®) to assist you with your risk allocation and portfolio diversification can provide an extra layer of assurance that you’re making the right decisions with your investments.
Talking with a CFP® can help you explore the many different types of investment vehicles you have to choose from today, and assess the risk of each type. Based on your objectives, you and your investment advisor can come up with a financial plan that makes good sense for you — wherever you are in life.
Divergent Wealth Advisors provides personal wealth management services to clients throughout Utah. Contact us today to schedule an appointment with one of our financial planning experts.
DISCLAIMER: It is important to note that this information is not meant to provide investment, tax, legal or accounting advice. This material is for informational purposes only, and is not intended to provide, and should not be relied on for, investment, tax, legal or accounting advice. You should always consult your own financial planning, tax, legal and accounting advisors before engaging in any transaction.
Approved by Rick Collins, Divergent Wealth Advisors LLC, Chief Compliance Officer 12/13/2017