Quite frequently we see investors taking an interest in age-based portfolios for the convenience of not having to monitor your investments and to eliminate the hassle of rebalancing. While the ease and convenience are attractive, age-based portfolios generally lump everyone together who is retiring in a certain year. They rebalance and reallocate your investments for you over time based on how close you are to retirement, moving from growth investments, like stocks, to conservative holdings, like bonds.
They assume that everyone your age has the same goals and risk tolerance, which is hardly ever the case. Age-based portfolios also often ignore the possibility you may have assets elsewhere. Investors are unique, so not everyone’s needs are the same. While age-based investments may be appropriate at times, we believe that they are less than optimal for the long-term investor.
A typical age-based portfolio for a senior investor, older than 55, might include 80% diversified bonds, 10% Large Cap U.S. stocks, 5% international stocks, and 5% real estate. Because these portfolios assume investors need conservative investments the older they become, they may be hindering the growth needed between now and when an investor chooses to retire.
We believe that your age is much less impactful on your money than your liquidity needs are. Therefore, we base portfolio asset allocation on your spending. You can have $5 million in your portfolio when you retire, but if you spend $500,000 a year from your investments, the chances are high that your portfolio will not last very long. Likewise, you can retire with $900,000 if you only need to withdraw $25,000 to $30,000 a year from your retirement savings. With the right allocation, you have a better chance of making that last.
If you have more than 10 years until retirement and you are a conservative investor, instead of owning a mix of bonds, we would recommend you own big blue-chip stocks that have been in business for many years and that pay healthy dividends. Having too much of your portfolio concentrated in bonds puts you at risk of losing your purchasing power to inflation.
We’ve benefited in the past several decades from low inflation. However, a 60-year-old investor can generally expect to live into his 90s. You cannot assume that inflation will not be cause for concern for another 30 years. If you do not have liquidity needs—either because you are more than 10 years from retirement or perhaps you are retired but do not need to withdraw from your retirement accounts for living expenses—why hinder the growth of your portfolio? We believe bonds should correspond with your liquidity needs and held to maturity, if possible. If you need $20,000 from your retirement portfolio in five years, it is important to protect that principal. However, if you don’t need that $20,000 until 2030, there is no sense in hindering the growth by investing in bonds. You have your money in the market to grow in the first place; therefore, we believe you should hold strong companies that pay healthy dividends.
If you don’t have the time to monitor your portfolio full time, it may be time to consider an asset manager. While you might pay 1% to 1.5% of your portfolio balance each year in management fees, you gain the benefit of having someone actively managing your portfolio who will constantly monitor and rebalance to keep your investments in line with your goals and achieve the customization that you need.
Finally, in our opinion, age-based portfolios also tend to miss out on tactical and strategic allocation. An active asset manager can rebalance in response to economic developments, taking advantage of shifting market conditions by increasing the level of investment in asset classes that are expected to outperform in the shorter term.
With all that said, age-based portfolios do have their use, often in company-sponsored retirement plans. If you are participating in your 401(k), but you are truly clueless about your investment choices and do not intend to seek out advice, choosing an age-based fund is better than sitting in cash or high-yield bonds.
If you have questions regarding your asset allocation, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
