Do you remember 2008, 2000 or maybe as far back as 1987? Each generation has one or more stock market crashes etched in its collective memory. Uncomfortable as they are, it’s normal behaviour for stock markets, and to a lesser extent bond markets, to move up and down. Asset allocation is the best approach to manage the various risks involved in investing. It broadly diversifies your portfolio (“investment pie”) by:
Identifying your risk capacity and risk tolerance is critical when developing an appropriate asset mix for your retirement assets. But your investor identity is also influenced by your age, investment characteristics and several other factors. All are used to create your investor profile. Answer the questions below to determine your investor profile and view your ideal asset allocation.
Don’t just use one tool. They aren’t all the same. Try out two or three and compare the results. Wherever you have investment accounts, these firms likely have a tool or questionnaire available for self-assessments. The accuracy of any calculator is limited based on how you answer the questions and the weighting assigned to each question. Small differences may result in different calculators producing different target asset mixes.
The tools select how best to allocate your investments between each asset class, as a percentage of the total portfolio. This your target asset mix. Build your retirement portfolio (all of your accounts designated for retirement) to align with your target asset mix.
Tools, such as asset allocation questionnaires and investor profiles, are designed to suggest appropriate asset mixes for retirement savings. They are not necessarily designed for investing in the short term.
Identifying your retirement portfolio’s asset mix is a crucial step. It helps you to:
Your current asset mix, may be different from your target mix. Aligning the two is crucial. If they don’t match, you could be taking on more or less risk than is suitable for your portfolio. You might think you’re okay but won’t be if an unexpected negative return makes it harder to meet your objectives. To find out if you’re on target, see Rebalance Your Portfolio.
Review Questions Beyond the Investor Profile when examining your target asset mix, to determine if there are any considerations that you should take into account.
As you approach retirement, your investor profile may change. You may need to consider reallocating some of your assets. Begin periodically reviewing your asset mix at least ten years before your planned retirement date.