Choosing investments

Your Optimal Asset Allocation Depends on 5 Key Factors

Asset Allocation: Everyone knows it’s important to invest – and invest regularly – but deciding what to invest in and how aggressive to be in your investment decisions can be difficult. There are lots of factors that come into play when establishing a strategy to invest better, but like any other financial decision, it ultimately comes down to personal choice. Most people choose a mix of individual stocks, bonds, mutual funds and other investment vehicles to attain good returns in any market. But how much should you invest in each category?

Planning an investment strategy without knowing what your options are or without understanding the factors that can – or should – be influencing your decisions can result in a strategy that doesn’t effectively help you meet your financial goals. Here are five factors for you to think about when developing a new investment strategy or modifying an existing one:

1.      Age – Most investment professionals will tell you that the life changes that occur with age play a huge role in planning an effective strategy. Generally speaking, when you’re younger, you have more time to ride out the ups and downs of the stock market, and that means this is often the best time to take on a little more risk. Of course, you may also have young children with future tuition needs and other expenditures, all of which can have an impact on your investing. If you’re closer to retirement, risk management becomes much more critical; big market dips can have a huge impact on your retirement savings.

2.      Financial status – Where are you in your retirement funding? Will you need to pay tuition for children? What other major expenses do you anticipate? How much do you have in savings now? What is your salary and do you anticipate increases? Do you plan to change careers? Ideally, while you want to invest for your future, you don’t want those investments to jeopardize the present. Begin with an understanding of your current financial status and your budgetary needs, both for now and into the future, to ensure a good balance of long- and short-term investing that won’t leave you short at the end of the month. No matter what your financial situation may be, make investing a high priority by setting aside an amount for investing (for example, in 401Ks) as budget item Number One.

3.      Goals – Certainly, retirement is a major goal, but it can also be a tough one to pin down. Now is the time to really think about where you’d like to be in 10, 20 or even 30 years. What goals do you have and how much money will you need to accomplish those goals? Again, be realistic and also understand that your goals may change as you age. While retirement is probably on most people’s lists, there are lots of goals to consider. Annual family vacations, going back to school or starting a side business are a few examples.

4.      Risk tolerance – In part, your personal risk tolerance depends on a careful evaluation of the first three factors coupled with brutal honesty of your ability to handle the stress and anxiety that accompany riskier investments. At its heart, risk tolerance is more about a gut feeling than any hard-and-fast rules, and that makes it arguably the most difficult factor to assess. It’s even more difficult if you and your spouse have different tolerance levels. Even so, work out the differences; or respect each other’s good sense and share your asset allocation decisions with each other. You don’t have to completely agree – each can have his or her own portfolios, but you should be aware and coordinated.

5.      Cost – The final consideration is the cost associated with your investments. While you could choose to use a financial advisor to help you make decisions, no one knows or understands your investment goals better than you; what’s more, advisors can charge exorbitant rates and fees that can take a huge bite out of your annual investment returns.

The InvestBetterSpendSmarter (IBSS) blog is designed to help investors invest better. We are providing tools that you can use to self-direct your investments. Examples include our Fun Stocks Watchlist™IBSS Stock Picks™TSOA Retirement Model Portfolios, and ETF/Mutual Fund Model Portfolios. Our tool called “My Optimal Asset Allocation Analyzer (MOAAA)©” helps you to get clarity on your personal situation with regard to the five factors above.

Check you asset allocation now!

Jim Tso




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Jim Tso wants to “give back” and share his 35+ years of successful personal money management experience to help others to achieve their financial goals. Jim created this InvestBetterSpendSmarter blog (IBSS) to provide you with free investing, planning, savings, retirement, and inspirational tips derived from his unique, innovative, and proven approaches to money management. He welcomes and appreciates your feedback.

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