by Donn J. Sinclair MBA – March 12, 2020
Asset allocation refers to the mix of investments you choose for your IRA. More specifically, what percentage 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.
A Few Words About Risk and Reward in Your IRA
You should carefully consider any savings and investment vehicle’s objectives, risks, expenses, and rewards. Not all savings and investment vehicles may be appropriate for everyone. Every individual is unique, has their own set of financial circumstances, and comfort level with saving and investment risk. Also, prior to any IRA decisions or IRA investing, you should carefully read the available material to better understand the specifics of your selected IRA savings or IRA investment vehicle.
You should consult your tax advisor or www.IRS.gov for more information. The above information is intended as educational information and not as investment advice. This is a great time to check and update the beneficiary designations on your Traditional IRA, Roth IRA, and any IRA Rollover.
Donn J. Sinclair, MBA (803) 329-0609 March 12, 2020
@Sinclair Financial Solutions is independently owned and operated. Donn J. Sinclair, MBA is insurance licensed in NC & SC (NIPR NPN#1722815). Investment Advisory Services offered through Prosperity Wealth Management, Inc., 2333 San Ramon Valley Boulevard, Suite #200 – San Ramon, CA 94583. Securities offered through Fortune Financial Services, Inc., 3582 Brodhead Road, Suite #202 – Monaca, PA 15061; branch office of record located at 948 Myrtle Drive Rock Hill, SC 29730, Member FINRA/SIPC. Sinclair Financial Solutions, Prosperity Wealth Management, and Fortune Financial Services, Inc are separate entities. SC Real Estate License #76530, and NRDS #554027312.