Managing Across the Risk Spectrum – Choosing the Right Investment Portfolio Allocation Based on Age and Market Conditions

While reviewing and updating my 401K allocations at Fidelity, I noticed this relatively common graphic showing portfolio mixes (allocations) based on an investor’s risk profile. Generally speaking most financial advisers and traditional market wisdom tell you that your portfolio allocation should be based on your age, which determines the duration of your investment. The younger you are, the more aggressive, while the closer you get to retirement, the more conservative one should be. So a 25 to 30 yr old would predominantly have a stock based portfolio, while folks in their 50’s would be more invested in bonds and cash.

However, after the year we had in the stock market, should this be the primary criteria we use? No. In fact I think market conditions, as much as age and other factors, should determine the optimal asset mix. Using the graphic below one should adjust their portfolio regularly based on market conditions, need for liquidity and how much risk they are willing to take. I refer to this as managing across the risk spectrum.

For example, rather than blindly invest in a target retirement fund or just leave all your money sitting in a single asset class, anyone that contributes to a 401K, IRA or regular investment account should adjust their portfolio up and down the risk spectrum on a periodic basis. You don’t have to do this every other week, but I would say once every quarter or at least twice a year. For example, early this year with the market in free fall, I changed my 401K contributions to be geared more towards bonds and money market funds. This would seem illogical for someone in their 30’s if you followed what the pundits tell you, but that move saved me thousands of dollars as the market plummeted.

Some would argue that I should have kept on investing according to my risk profile and taken advantage of dollar cost averaging, but as I discussed recently, when markets are in free fall, dollar cost averaging is a poor strategy.

Rather than keep investing in a losing asset, I just changed my 401K contribution and portfolio mix in line with my new risk spectrum at that point in time (conservative). This minimized my losses and allowed me to build my cash based reserves. Then, as the economy showed signs of improvement and international markets started picking up recently, I moved up the risk profile (growth) and started investing more in stocks. Since March this has yielded me a 14% return (and about 25% on my new contributions).

I will revisit my 401K account in a few months and based on where I think the economy and market are going I may well readjust again. The point is that in current and future markets, one cannot just sit back and hold onto a losing portfolio, justifying their decision by saying, “I am young, my portfolio will recover…”. That’s the old paradigm, and in the new market smart investors are the ones who pay attention and adjust their short and long term investing strategies. Remember, it takes a 100% return to recoup 50% in losses. So if you haven’t checked your portfolio in a while, now may be the time. If you are uncomfortable with this aspect of investing then see a professional.


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