How Do You Know Which Asset Class(es) is Right for You?

One important piece of information to share with your investment advisor is how much time you have to invest in order to achieve your goal. This is all part of having open and honest conversation with the person who will invest your money.

If you’re young and have a long time horizon before you need funds to buy a house or for some other expensive purchase, you may find that an aggressive portfolio is right for you. A young person’s portfolio can be 100% stock-focused—that is, it is totally focused on growth. That may sound very risky, but it is a good hedge against inflation. (A 100%-stock portfolio can still be well diversified by varying the asset classes of the stocks.) In addition to minimizing inflation risk, an aggressive portfolio gives you the best chance of higher returns in exchange for higher market risk and volatility.

A 100%-stock portfolio should have a time horizon of at least 10 years to weather downturns in the market. In the worst case scenario, $100,000 invested in stocks would still be worth at least $100,000 10 years later. You would not be pleased with this outcome, nor would I, and while it is possible, it is probably the worst case scenario even though it’s the riskiest form of allocation. Remember the Investor’s Dilemma? In these circumstances, the key is to continue to hold.

At the opposite extreme is retirement money. You’re not going to spend all of it 10 years, six–nine years, three–five years, or one–three years; it must last the rest of your life. For this investor, the goal is to generate a stable income for the rest of your life. Investing for that goal generally involves a portfolio with 50–70% stocks and the rest in fixed income. Many of my clients use a 60% stocks and 40% fixed income mix, which is a very traditional pension mix.