by Donn J. Sinclair MBA Personal Financial Advisor August 2, 2022
Asset allocation refers to the mix of investments you choose for your IRA. More specifically, what percentage of of your IRA portfolio do you have invested in stocks, bonds, cash, and other asset classes. The IRA could be a Traditional IRA, IRA Rollover, Roth IRA, SEP-IRA, or SIMPLE-IRA. Your asset allocation should always consider your temperament for risk.
Finding Your Mix
The concept behind asset allocation is very simple: Don’t put all your eggs in one basket. But the implementation may be somewhat more complex. The mix of assets you choose for your IRA depends largely on your personal financial situation, your time horizon, and your risk temperament. Personal financial considerations include: will you and/or your spouse continue to work seasonally or part-time during retirement; how much have you saved to date for retirement; whether your retirement savings are post-tax or pre-tax(IRA, 401k, etcetera). Your time horizon is the length of time you have to invest before you need your retirement funds. Several financial goals may require that an IRA portfolio have several time horizons; and these different goals may actually be in conflict.
Your Risk Temperament or Tolerance
This is your financial ability and emotional willingness to take risk in pursuit of reward with your IRA. Calculating your risk tolerance requires you to examine your income, your assets, your responsibilities, and your ability to cope with stock and bond markets ups and downs. When you pursue IRA financial goals as a household, then you must also consider your spouse’s risk tolerance.
Rebalance Your IRA Portfolio
Once you calculate an IRA asset allocation that feels right for you, then periodically you should monitor your allocation. A portfolio that starts out with 60% stock funds and 40% bond funds may shift to 70% stock funds and 30% bond funds, if your stock funds outperform your bond funds for a length of time. Conversely, if bond funds outperform stock funds, then your asset allocation portfolio may be overweight in bond funds. You should establish regular time periods to review your IRA portfolio, and rebalance your asset allocation as necessary. Should your IRA get out of alignment, then you may rebalance your portfolio by selling or exchanging assets in one category, and buying or exchanging assets in another. Pay attention to any rebalancing costs.
Changing Times and Course
As you get closer to your financial goal and you time horizon shortens, then your ideal IRA asset allocation could change. Generally you should pursue a more conservative asset allocation when you have less time to reach your financial goals. Life changes including: having children, caring for aging parents, loss of employment, and adverse health may also impact your financial goals and risk tolerance. Your IRA asset allocation should change accordingly.
Donn J. Sinclair, MBA Personal Financial Advisor
Updated in Charlotte NC and Rock Hill SC
August 2, 2022 (803)329-0609
