Asset allocation is not formulaic, nor is it purely age-based. Investing should always be goals-based. The way you invest money for a particular goal depends on your needs and time horizon relative to that goal, as well as your personal risk tolerance. Asset allocation should be customized to reflect this.
One way to approach this discussion is by looking at the major milestones that you expect within the next year, five years, ten years, and beyond. This will give you a framework for your financial road map.
Here are a few examples of major goals and financial milestones to help start the conversation.
- buying a home
- starting a family
- funding college costs
- career changes
- starting a business
- retirement (or semi-retirement)
- leaving a legacy
Then, get more specific. With each pool of assets, you can ask yourself a series of questions. For what will I need this money? When will I need it? Am I investing this in a way that takes on an appropriate amount of smart risk so that these assets can grow in line with my goal? For instance, the assets you invest for retirement in thirty years can be dealt with differently than those you invest with the intention of buying a home within the next ten years.
Once you create this road map and chart your financial milestones, this plan can serve as a guide in the years to come. Periodically revisit your financial plan to make sure that it is still a good fit for you and your goals. Some key times to review: 1) At least once a year, such as at the New Year. 2) As you approach any major financial milestone, or add a new one to your list of goals. 3) If anything changes with regard to your underlying expectations about each milestone (for instance, you decide to opt for a semi-retirement and postpone full retirement for several more years).
If you choose to consult a professional financial advisor, seek out an independent fiduciary, who is legally required to act in your best interests. They can help you make sure that your assets are best positioned to grow in line with your goals.
