Protect yourself with asset allocation


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You’ve enrolled in your workplace 401(k) plan. Maybe you even contribute to an IRA or put money away in other retirement savings accounts.

That’s all well and good, but if you’ve got a hands-off style to retirement planning — maybe you simply check account balances on occasion — you could be doing yourself harm. Paying attention to asset allocation will help ensure that you’re on track to meet your retirement goals.

A financial adjustment

Asset allocation may sound overwhelming, but think of it as a financial checkup. You’re really assessing how well various investments have fared to ensure you’ve got enough invested in each asset class — say, large-cap stocks or bond funds and the like — so your investments are in line with your risk tolerance and poised to produce the type of earnings you’ve planned on.

While most individuals have heard about the importance of asset allocation, a 2014 survey of investors by investment bank NATIXIS finds that investors are relying on “gut instinct” and feeling torn between a desire for high returns and a fear of risk.

How often should you check your asset allocation?

At least once a year — or if you change jobs, have a child, get a divorce or experience some other major life change that will impact your finances, says John Markese, former president of the American Association of Individual Investors.

“I encourage people to look at everything annually. Then you can reconfigure your investments if it’s necessary.”

Hitting the right balance

Your investments can grow or shrink at varying rates in any given year, and these performance differentials will affect your overall balances. For example, let’s say a particular stock or mutual fund had a terrific year. Its stratospheric growth means it now makes up a larger share of your overall portfolio than you originally planned.

Likewise, investments that lost ground will be a smaller slice of your investment pie. If so, you need to go in and tinker. That may mean selling off some of those winners or simply adding more of something else to the mix to hit the right balance.

Of course, selling off winners can be emotionally tough to do. Markese recommends taking extra cash from a yearly pay raise and “directing it to investments that haven’t done as well to rebalance your portfolio.”

On the other hand, you probably don’t need to buy or sell if your asset mix is skewed less than 10 percent.

“Let’s say you’ve got 60 percent stocks and 40 percent bonds and you want a 70/30 mix — then think about selling and buying,” Markese says.

Within a retirement account, buying and selling activities won’t create tax repercussions. But rebalancing investments in a taxable account very well could, particularly if you’re selling winners. These gains, of course, can be offset by losses.

How to allocate assets

Your savings goal, and how much time you have to reach it, will directly impact the kind of investments you choose and how you allocate them over time.

When you’re young, you can afford to take on more risk. If there’s a bad year, you’ll make up losses. For that reason, pros agree that investors in their 20s and 30s can have as much as 80 percent or more of their portfolios allocated to equities, which have boasted the highest returns over time. As you approach retirement, however, you probably need to scale back, since you have less time to recoup losses. In some cases, you may have such a fat nest egg in retirement that you don’t need growth but just want income. In that case, the bulk of your investments could be in safer investments that produce income.

The good news: It’s getting easier to maintain the right asset allocation thanks to products like target-date mutual funds. You choose a retirement date, and the fund automatically reallocates its holdings from year to year, becoming more conservative as time passes.

You may also want to consider checking with a pro if you need help conducting a financial checkup.

Certified Financial Planners are experts trained in a variety of retirement issues and can give comprehensive advice. Find a CFP at the Financial Planning Association website,, or check with National Association of Personal Financial Advisors for fee-only planners at