Allocate to Achieve a Goal and Rebalance to Maintain It

Entering retirement is a good time to strategize on how best to allocate your resources to achieve your goals. Maintaining your strategy will keep you on track. In this article I'll review the basics of allocation.

At retirement you have some 20 or 30 years to live according to statistics. That range of years implies you'll need some long term growth strategy to maintain the value of your investments against inflation's damage. But if you need to live on part or all of your investments, they'll have to generate some income to pay for your yearly expenses.

If you have plenty of living income from pensions, social security, and a few investments, then you can aggressively invest your additional investments for long term gains. Deciding your own situation on income and excess investment determines your allocation strategy.

Choose an allocation to achieve your goal The three typical investment categories are stocks, bonds, and cash. They all have many renditions as mutual funds, ETFs, money markets, unit trusts, certificates of deposits, etc. that produce stock-like, bond-like or cash-like performance.

But historically they each represent three different statistical return and risk categories to choose from. And these historical performances determine what is realistic to expect in each category for investment growth and at what risk.

Stocks have historically had the highest returns over time, but carry the greatest risk. To gain these higher returns, investors need both the time and a willingness to ride out market downturns. This requires a long term strategy (at a minimum of 5 years - the more the better).

Bonds are less volatile then stocks but offer more modest returns. Investors approaching a near term (6 months to 5 years) need for income might increase their bond-type holding because of their reduced risk of loss. Cash and cash equivalents - such as savings deposits, certificates of deposit, treasure bills, money market deposit accounts, and money market funds - have almost no risk. But they're most vulnerable to inflation. Use this category only for amount you'll need for immediate (within 6 months) use.

Retirees generally lean toward a lesser risk portfolio of investments because of their nearer term need for income. Typical percent allocation of a portfolio among stocks - bonds - cash category types ranges from 40 - 40 - 20 to 20 - 60 - 20. Of course you should diversify your holdings within each class (at least for bonds and stocks) so you're not depending on only one or a few companies. Companies can default or go out of business. So diversify your investments within each category. And that's where all the various funds and other investment vehicles come into play.

Rebalance annually to preserve your goals

Keep up with the changes as you move on through your retirement. The markets, your health and life status, and other incidents will surely change your economic circumstance. Be ready to react.

Once you've made your allocation for your current circumstance, the market takes over. Perhaps your growth funds (stocks) will rise fast while income funds (bonds) lag. But whatever happens, your allocation most likely will shift due to market gains or losses. It's a good idea to rebalance your portfolio back to the allocation you set for it. This keeps you consistent with the risk and goals you originally chose - if all other living aspects remain the same.

So rebalancing allows you to:

* maintain your strategy and risk levels you determined as best

* take profits when they occur - perhaps your stock fund grew out of proportion.

* buy at relatively lower levels - perhaps the market has deflated your stock fund.

Balancing prevents you from trying to squeeze the last bit of profit out of a growing market and allows you to take advantage of downturns to buy 'low' for later selling 'high'. It keeps you on a conservative track.

Reallocate for new goals and risks However, if your health takes a turn for the worse so you're life style changes, reallocate accordingly. Or your medical needs become more immediate so your traveling budget becomes unnecessary. Losing a spouse may leave you with new and less expensive living options among a host of other alternatives.

Personal changes like these may alter your need for income and your tolerance for risk. In this case you may rebalance to a new allocation that reflects a new goal and risk level.

So as you proceed through your retirement into middle and late retirement phases, and also experience other life-changing circumstances, you should re-strategize your allocation. As time goes on, you may naturally want to shift to more assured income producing funds when your horizon for market growth and recovery become shortened with age.