Allocation: Is it that important? Yes, now, more than ever?

Posted:  Monday, September 25, 2017 - 12:30pm

About this blog:

  • Sarah Ruef-Lindquist, JD, CTFA

    Sarah believes sound, thoughtful planning is a gift we give ourselves, our families and our community.

    She is a lawyer and seasoned non-profit executive who has worked with dozens of organizations, individuals and families as a philanthropic advisor and senior trust officer. She holds the Certified Trust and Financial Advisor certification and FINRA Series 7 and 66 registrations through Commonwealth Financial Network. Sarah and her husband live in Camden. The Financial Advisors of Allen and Insurance Financial are Registered Representatives and Investment Adviser Representatives with/and offer securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Allen Insurance and Financial, 31 Chestnut Street, Camden, ME 04843. 207-236-8376.

Many investors have stock and fixed income allocations set for their portfolios that are well-thought out and (hopefully) monitored by their advisors, and even modified over the years as time horizons and risk tolerance change.  But what if you don’t have an advisor keeping tabs on that for you?  Is it really that important? Recent history can help to demonstrate how important it is to set, monitor and adjust allocations to support the goals we have for our investments, and especially the investments we have to support us in retirement.

Consider the growth of the stock market as indicated by the S&P 500 Index since the low in 2009, just over 8 years ago:

     March 6, 2009                     Sept. 15, 2017

            683.38                                2,500.23

This change over the eight years since the height of the Great Recession represents growth in value of almost 400%. If your retirement account was allocated 60% stock and 40% fixed income almost 10 years ago, and remains so allocated, chances are the stock portion has increased in value substantially in comparison to the fixed income portion.  In addition, most would agree that as one gets closer to retirement, that allocation should be adjusted to reduce the stock allocation and increase the fixed income allocation.  Do you know if your retirement accounts have been monitored and adjusted to reflect not only the stock market’s recent growth, but your increased age?

One of the most important reasons to decrease stock allocation as we age is to reduce the risk of losing value as you get closer to actually withdrawing funds and relying upon them for retirement. If you had a 60/40 allocation in 2007, the stock portion could have lost more than half of its value when the S&P dropped from 1,561 October 12, 2007 to that 2009 low of 683.38. 

A $500,000 investment portfolio could look something like this, comparing two different allocations:

                                            60/40 stock/fixed Allocation                           40/60 stock/fixed Allocation

                                        10/12/2007         3/6/2009                               10/12/2007         3/6/2009

Stock Value                     $300,000              $168,000                              $200,000          $112,000

Fixed Income Value        $200,000              $200,000                              $300,000           $300,000

                Total:              $500,000              $368,000                              $500,000           $412,000

A vast oversimplification, but you can see that the higher allocation in stock during the downturn resulted in a greater overall loss than the lower allocation of stock.    If your sole sources of income were your social security and a 5% draw from the portfolio, the difference in value would translate into 10% less income on which to live if your stock allocation was 60%, instead of 40% in retirement.

With the markets reaching record highs, and many anticipating a “correction” in the market, revisiting your allocation – especially if you are within 5 to 10 years of planned retirement, or if you’re already retired - is a very prudent move. Call a financial advisor to help guide you through the options that make the most sense for you, your family and your financial plan and goals for your investments.

*Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.