Investment allocation – Step 2 of Securing Your Retirement

The old myth that a portfolio allocation of bonds should equal your age remains a common question for those entering retirement. The premise of this myth is that once you enter retirement you should look to preserve assets by increasing bonds/fixed income holdings in your portfolio.

If risk tolerance is the ability to stomach volatility or variability in the portfolio then the concept of more bonds may sound reasonable. However, recent history suggests bonds can be as volatile as stocks.

Harry Markowitz received the 1990 Nobel Memorial Prize in Economic Sciences for his work on Modern Portfolio Theory (MPT). He sought to prove a diversified, or ‘optimal’ portfolio, could maximize returns and minimize risk to be a practical approach to investing. This approach of a well-diversified portfolio with regular rebalancing is still practiced throughout the investment world.

If we adopt the principal of his theory to reduce risk or volatility, then the theory of optimal portfolio is not about age. Rather, it is about expected performance to your needs.

Risk is emotional so understanding asset allocation on the risk tolerance spectrum – conservative, moderate conservative, moderate, moderate aggressive, and aggressive – may provide a better measurement of a portfolio being reflective of you rather than your age. Bonds/fixed income lies on the conservative end of the spectrum with stocks/equities on the aggressive end. In between these two bookends is the sweet spot Harry Markowitz refers toas optimal.

When developing a portfolio that aligns your values, goals, and risk tolerance the measurement of success is the ability to meet your needs over time with a portfolio reflective of your life needs not of old myths. The challenge is managing the emotion of volatility, particularly as you enter the transition to retirement.

Our work with clients is centered around aligning values, goals, and risk tolerance to minimize the emotional roller coaster of daily news and old myths. This approach helps people live fully to their financial ability enjoying their retirement years.