That way, she says, "you've sort of bulletproofed your portfolio."
To keep up with your money and reach your goal, you also want to have a succession of plans, not just one, over the course of your investing life. Beware of the one-size-fits-all solution.
"There is no perfect portfolio," says Swedroe. "There's only the perfect portfolio based on your ability, willingness and need."
"There is no perfect portfolio. There's only the perfect portfolio based on your ability, willingness and need."
Several different planners could recommend different allocation plans to the same client. Two clients who looked roughly the same on paper could select vastly different investment plans (one reason many financial planners caution consumers to use online asset allocation plan calculators as an information or research tool, not as a one-stop source.)
"No two clients are alike," says Berg. One of his clients is a 40-something who is an inveterate saver. But her tolerance for risk is low. "So we have her portfolio in a 50/50 mix" of stocks and bonds, he says. While that wouldn't be his solution for everyone, he says, "She's willing to save longer and take less risk."
Where to startYou and your financial planner will first look at several things. What is your goal and when do you want this money available? If you're retiring in 30 years, the plan could look much different than if you're retiring in the next decade.
Once you know your goal and timeline, "the rest of the pieces fall into place," says Berg.
Next, what is your risk tolerance? Usually, you balance this with your need to keep pace with inflation and come up with a mix that will keep your money growing and let you sleep at night.
The secret: "Not taking more risk than you have the ability, willingness or need to take," says Swedroe.
Some other factors you'll consider:
- What's your household income and how much money will you be investing?
- What are your needs and additional resources? If you're saving for retirement, will you also have a pension? Will you still have mortgage payments? Will you start a business or work part-time? Or would you rather read and travel?
But you have to be really honest with yourself. "A lot of people think they can tolerate higher risk," says Cabaniss. "But 99.9 percent of people cannot take high volatility and cannot take unsettling news."
Look for your risk tolerance to change over time, as your salary increases, as your life changes and as you get more experience as an investor. If you're half of a couple, the more difficult task is to factor in the risk tolerance of both parties.
Based on the information, you and the planner will decide what percentage of your investment money should go into certain asset classes. Ideally, "you want things that when one is doing not so well, the others are doing great," says Swedroe.