Age is just a number. While it can be a factor in determining your portfolio's optimal asset allocation, Fisher Investments believes your age should be far from the only factor. Asset allocation is the mix of stocks, bonds, cash and other securities in your portfolio. The right asset allocation is crucial for helping you reach your long-term investment goals, and different financial professionals have varying methods to determine your optimal allocation. Many rely too heavily on age-based formulas. For example, they may suggest subtracting your age from 100, or another number to determine your portfolio's optimal stock allocation.
But Fisher Investments thinks these rules are overly simple and not personalized enough to you and your investment goals and objectives. It may be easier for advisors to base their entire recommendation on your age, but that neglects your individual situation. To see the fault in applying overly simple age-based asset allocation rules, Fisher Investments suggests considering the case of two individuals with the exact same age and retirement savings.
A Tale of Two Retirees
Jane and Wanda are both 65 years old and have the same size portfolio. Jane is a widow, and has one son who is in his 30's. Her son is independent and does not require any financial assistance from Jane now, nor does he expect to in the future. Jane's parents passed away of natural causes in their 70's. Jane has had two heart attacks. Jane needs her money to be a primary source of income during her retirement, but does not need to plan to leave a legacy.
Wanda is currently married, and her husband is 10 years younger than she is. Wanda and her husband have two children, both of whom occasionally get financial assistance from Wanda. In addition to her portfolio, Wanda has several other sources of income that she is planning to draw from during retirement. Wanda's parents lived until their 90's, and she has not had any major health problems. Wanda would like her portfolio to be able to help support her and her husband throughout their lifetimes and provide some inheritance to help support her children after that point.
These two investors are the same age, with the same amount saved for retirement, but are in very different situations. Does it really make sense for Jane and Wanda to have the same investment portfolio? They have different goals, needs and personal situations! So should age really trump all these other considerations? Age can certainly be a factor, but we don't think it should be the only one or even the most important one, for that matter.
Age isn't the only number according to Fisher Investments
Fisher Investments believes you need a more comprehensive view of your situation when selecting your asset allocation. Think about what you actually need your portfolio to do over the course of your retirement. According to Fisher Investments, three important things to consider are your investment time horizon, return expectations and cash-flow needs.
Fisher Investments defines your investment time horizon as how long you need your assets to provide for you. Some investors misinterpret this as simply their life expectancy. However, your investment time horizon is not just how long you plan to live, but the amount of time you will need your money to provide for you and your dependents. Your current age can influence your time horizon, but you also need to consider things like your personal health, your parents' lifespans as reference points and the potential that you may live longer than expected due to medical advancements. You also need to factor in the same considerations for your spouse or any dependents you plan to leave money to after you pass. Your investment time horizon could even span decades beyond your own life! And it varies person to person.
Return expectations also play a role. Some investors want true capital preservation—they want to keep the amount of wealth they have now with little-to-no investment risk, even if it means losing purchasing power to inflation. However, Fisher Investments knows many investors need some growth, whether it's to provide cash flow later in retirement, keep pace with inflation or perhaps to grow the portfolio to an amount they wish to leave to beneficiaries or donate to charity. Consider the growth your portfolio may need to provide in order to reach your long-term goals.
Finally, cash-flow needs are crucial. Do you rely on your portfolio to cover necessary living expenses? Fisher Investments says many retirees do! How much will your portfolio need to support you? Do you plan to rely on your investments for day-to-day needs, or will it be supplementary to other income sources? Or maybe you don't plan to use your investments for cash flow at all in retirement. In any case, determining your potential cash-flow needs is a large factor in determining your optimal asset allocation.
Once you've considered these factors, Fisher Investments believes you will have a better idea of what you need your portfolio to do for you, and what asset allocation will help you get there. Selecting your asset allocation is a foundational investment decision. Choosing the wrong investment mix may be impossible to correct down the road. Overall, age can factor into this decision, but we think it's just one piece of the puzzle.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
