When to Change an Asset Mix

A lot of investors don’t realize that you cannot simply buy, hold and forget about it. Your investment mix should not be static. How much you have in stock, in bonds and in other instruments hinges on many factors. Like your age.

When the U.S. stock market hit its high a while back, it prompted a discussion with my business partner, Anna Sergunina. “So what does that mean to us?“ I asked.

“Nothing to me,” replied my younger partner. She was right: Anna has a lot longer to build wealth – and recover from market down drafts – than I do.

“Well, I was just thinking my timeline to retirement is less than 10 years.  Maybe it’s time for me to become a pre-retiree and change my asset allocation to reflect that,” I remarked.

The next day I changed my earlier asset allocation (90/10, stocks to bonds) to the more timeline- and age-appropriate 60/40. 

Why? Was this market timing? No, that’s when you make investments on the assumption that the market will move in a certain way. Say, if I believe that a market swoon is fast approaching. But no one can predict the future.

My change was a time horizon re-setting to a mix more reflective of my situation and prepares my investment portfolio for distributions in the not-too-distant future (think eight or nine years). In other words, I now have a more conservative mix. Because unlike Anna, I have less time on the planet to recover from stock market drops.

I’m a big fan of Richard Ferri’s book, All About Asset Allocation. It explores the tradeoff between risk and return, and the correlation among asset classes as you figure out how to allocate them. It also spells out different possible mixes depending on your age and risk tolerance.

His is my second most-recommended book next to Charles Ellis’ Winning the Losers Game, which argues that, since it is very hard to beat the market, index funds are a very good idea.  I routinely show clients the appropriate page from Rick’s book.  The one I’m now following is the pre-retiree asset allocation. Thank you, Rick.

The reason for financial planning is to have a roadmap and then follow that road map.  Eleven years ago, I developed my own financial plan. I submitted it to the National Association of Personal Financial Advisors as part of the requirements to become a NAPFA member and demonstrate my proficiency in this field.  I didn’t have to submit my own plan but I figured any reviewer comments or suggestions would help me and my family is a great way. 

That plan, subject to a few such reviewer comments and subsequent changes, is in effect today.  Every Jan. 1, I review my progress and look over my plan elements. I share it with Carol, my life partner of 40 years.  If she’s happy, I’m happy. Note: We are happy.

Bottom line: Each of us needs to have a plan, review it and adjust the blueprint as goals or timelines change.  Please don’t join or remain in the woulda-coulda-shoulda club.  To quote Nike, “Just do it.”

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James Ludwick is president of Main Street Financial Planning in Odenton, Md., and writes the blog Advice Only Musings.

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