In this article we will refer to a “retirement model portfolio” as a sample portfolio or target asset allocation that investors may use as a template off which they can base their own portfolios. Choosing the most appropriate securities and the right allocation to meet your investment goals is no small task. While retirement model portfolios may provide a potential reference point, they may overlook your long-term goals, personal situation, investment time horizon and other personal factors crucial to your investing strategy and asset allocation decision.
Everyone has different ideas about what retirement should look like and what makes a comfortable retirement. When building your retirement portfolio, you should first think about your retirement goals and objectives before determining an appropriate asset allocation.
Each investor’s situation is unique, there is no one-size-fits all retirement model portfolio. Factors such as life expectancy, income needs and family situations will vary from investor to investor. Before starting your search for an appropriately constructed portfolio, it is important to understand what you wish to do with your money. After all, portfolio construction is about making sure you have the ideal asset allocation so you have enough money to live the lifestyle you desire.
We believe asset allocation is the single greatest determinant of your retirement portfolio returns. Asset allocation is your retirement portfolio’s mix of stocks, bonds, cash and other asset classes. Stocks, bonds and cash are three of the most common asset classes, but they have very important differences:
Given the many benefits of proper diversification, investing heavily in just one company or sector within the stock market can greatly increase your overall risk. Intuitively, diversification makes sense, and finance theory agrees: Diversifying is an essential part of risk management and can be vital to long-term investment success. Yet most American investors aren’t nearly as diversified as they think. Some American investors tend to focus solely on US stocks. Overlooking the investment opportunities abroad can be a detriment towards your long-term performance.
A common misconception is that diversification can only be achieved by spreading your money across various asset classes. However, you can add international stocks or choose stocks from different sectors, company sizes (large-cap, mid-cap or small-cap stocks) and investing styles (value vs. growth) to spread your risk across different countries and areas of the market.
So what asset allocation makes sense for you? First, you will need to determine your primary investment objectives.
Different asset allocations will meet different objectives. Your optimal asset allocation depends on what you hope to accomplish with your funds in retirement. You need to be able to meet your goals and rebalance your portfolio allocation as circumstances change. Here are some common objectives when considering retirement model portfolios:
Regardless of which category you fall into, there is no single retirement portfolio model that applies to every situation. We believe the best way to reach your end goal is by constructing a personalized portfolio specific to your needs.
Creating a personalized portfolio can greatly improve your chances of meeting your retirement goals. No two investors have identical situations and objectives, so why should your portfolio be structured as such?
Some investment and mutual fund managers determine a portfolio’s asset allocation based solely on categorical factors such as age and risk tolerance. These factors should be considered, but they aren’t the whole picture. Rather than looking at your individual goals, these models simply set up your portfolio based on your age and risk tolerance level. But we believe you should tailor a portfolio based on your income needs, spousal situation and many other aspects of life as well!
As an investor, having to choose from millions of unique securities can seem like a daunting task. Fisher Investments uses a top-down investment approach, analyzing factors such as current economic conditions, the political environment and investor sentiment prior to selecting an individual security. We believe these high-level factors are far more important when it comes to analyzing how to best position client portfolios for success.
Understanding your financial picture is the first step in tailoring a portfolio specific to your financial objectives. Some of the factors we consider when crafting your optimal long-term investment strategy are your:
As circumstances in your life change, your portfolio needs may need to change as well. A mutual fund’s portfolio may not have the flexibility to adapt to changes within the capital markets or your financial needs. Our Investment Policy Committee evaluates the economic, political and sentimental drivers in the global markets before deciding to invest in stocks. Unlike money managers who focus on narrow investment categories, we focus on diversification among what we believe are the most appropriate investment options based on our forward-looking views of market conditions.
For more information about what Fisher Investments recommends as an ideal allocation for your investing needs, please contact us to speak with a financial professional or learn more by downloading one of our educational guides.
[i] Source: Global Financial Data, Inc.; as of 01/12/2018. Based on annualized S&P 500 Total Return Index returns from 12/31/1925- 12/31/2017.
[ii] Source: FactSet, as of 2/12/2018. Based on US BLS Consumer Price Index from 12/31/1925 to 12/31/2017.