How to let your age dictate your asset allocation


When it comes to money and sharing your assets, time is either on your side or it isn’t.

The types of assets you should invest in depend more on when you’ll need the money and your goals, and less on your risk tolerance or outlook for the stock or economy.

“The closer you get to a financial goal over time, the more you want to protect your capital,” says Roger Young, senior financial planner at T. Rowe Price. “You want a high probability that the money is there.”

On the other hand, “The more time you have, the more risk you can afford to take,” adds Brad Bernstein, managing director of UBS Global Wealth Management.

There is a time-bound sweet spot for every type of investment, whether it’s stocks, bonds, or a bank savings account. Why? There is a hard-to-ignore relationship between risk and how quickly you need to access your money.

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If you need to withdraw your money tomorrow for a specific reason, such as a down payment or a financial emergency, you want your money deposited in the most secure account you can find. Think cash. CD. Money market accounts. Short-term bonds.

But, if you’re saving for retirement or your newborn’s college tuition and you don’t need your money for 10, 20, or 30 years, you’re better off investing in riskier assets and higher yield like stocks. Although stocks have a much higher probability of losing value in short periods of time, the longer you hold them, the more the odds of losing money drop dramatically, even to zero in some cases.

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Stocks bought and then held for at least 10 years, for example, posted negative returns only 5% of the time from 1926 to 2018, according to Fidelity Investments. In contrast, stocks held for just one year lost value 25% of the time.

“In the stock market, over a period of a year, there’s a good chance you’ll lose money, and that can be a big loss,” Young says.

Another way to look at risk is to weigh the worst-case scenarios. The biggest decline for a one-year holding period for stocks was 37%, measured by actual total return — which includes dividend reinvestment and inflation adjustments — according to website The Measure of a Map. In contrast, the worst return for equity investors over a 20-year holding period was a 0.5% gain.

Cash, of course, is risk-free when it comes to protecting capital. And owning quality bonds, which have a low risk of default, is also much less risky, as a one-year holding period resulted in losses only 12% of the time; the odds of a negative return drop to 1% with a three-year holding period and zero if you hold for five years or more, according to Fidelity data.

This is why your “investment time horizon” should drive how you diversify your money among different types of assets.

“For us, timeframe is the most important variable when it comes to recommending an asset allocation to a client,” says Bernstein of UBS.


Bernstein points out, however, that no one — or no family — has only one time horizon.

In practice, whether you’re single or a household of four, you’ll have multiple financial goals, all with different time horizons, account types, and holdings.

You could, for example, have a 401(k) destined for retirement in 20 years loaded with stocks. Your spouse could have an IRA. You might have two different 529 college accounts, one for your fourth year student with a good portion of stocks and another for your high school that is mostly in bonds. You can have an emergency fund in a money market account at your local bank or an online brokerage account that you save for other things.

All of these different goals and timeframes mean that your money has to be divided into what UBS calls ‘compartments’.

“We believe in the bucket approach,” Bernstein says. “The goal is to have multiple investment strategies that achieve different goals.”

Have a mix of buckets, some filled only with cash or other risk-free investments, others with a diverse mix of bonds and cash, and others focused primarily on riskier investments, such than stocks, guarantees that you will have access to the money you need when you need it. And, most importantly, never have to sell your stocks in a bear market.

It’s “the last thing you want to do,” says Ruth Transue, senior financial advisor at Wells Fargo Advisors.

A retiree, for example, may have three buckets. A bucket with money to cover living expenses for up to two years. Another bucket made up of fixed income investments, such as bonds, to provide income to live on. And a third bucket, made up of equity funds or alternative investments, intended to grow a long-term heritage or to pass on to heirs.

People in their 20s, 30s, 40s and 50s who are in the “accumulation” stage, adds Bernstein, could have many more buckets, including many targeting long-term goals: “They have many different needs and can have 10 different accounts. The more time you have, the more money there should be in stocks.

T. Rowe Price now recommends that early in the retirement investment lifecycle, savers have 98% of their money in stocks, and reduce that to 55% in retirement to account for longevity and increase their chances of not missing out. silver. Similarly, Vanguard’s target date funds, which become less aggressive as retirement approaches, now hold about 50% equity for current retirees, about 60% for those retiring in five years, and nearly 89% for those retiring in 30 years in 2050.


If you need your money in…

One to two years – That’s money you can’t risk – ever. “These types of investments are meant to preserve capital,” says Young. If you need money for an emergency or a down payment on a house you’d like to buy next spring, the money should be in an account that lets you access the money quickly and easily – and without fear. that the account balance will be lower due to a downturn in the market.

“You want the money in a fairly safe investment,” says Young. “An insured bank account is an obvious choice. Other options would include a money market account or a short-term bond fund.

Having a cash “buffer” is important for everyone, but especially for retirees who need cash, so they don’t need to withdraw funds from their 401(k) in a bear market. , explains Transue. For example, as part of a financial plan for a divorced woman in her 60s, Transue built up a cash cushion of a year’s worth of living expenses and placed it in a money market. This allowed her client to stop earning income from the investment portion of her portfolio during the recent bear market. Transue recommends people within two years of retirement start building a similar type of emergency fund.

  • Five years – From a time horizon perspective, five years is not a long time. So, stick to more conservative investments, advises Young. “You probably don’t want a lot of stock,” he says. Low-volatility investments that generate income, such as short-term bond funds that mature within five years and low-default corporate bonds, make the most sense, he adds.
  • Five to 10 years – The money you need within a decade should be invested in a diverse menu of investments, including stocks, US or corporate bonds, and a cash reserve for emergencies. It’s a more balanced approach. Spread your investments and hold stocks of large and small companies, international stocks, as well as growth and value stocks, says Young.
  • 10 years or more – “More than ten years is a reasonable way to think long-term,” says Young. And that means buckets with so much time on their side should be invested primarily for growth.

“Over a longer time horizon, you want to focus on stocks that offer you growth potential,” says Young.


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