Asset allocation is important
Friday, February 20th, 2009Today, many Americans are feeling nervous about opening an envelope they used to look forward to — their 401(k) or individual retirement account (IRA) statements.
This past year was particularly difficult for the financial markets. To put it in perspective, the nation has not seen this type of unstable financial environment in 80 years. No matter what type of assets you hold in your 401(k) or IRA, more than likely they have fallen in value during the past year. That is why it is important to allocate your assets in a variety of investment types.
Asset allocation gives you the opportunity to lessen your overall portfolio risk. Investing in broad groups, such as stocks, bonds, commodities and Real Estate Investment Trusts may have lower risk than putting it all in one asset type. Generally, one of these investment types is going up in value, or holding its value, when others may be going down in value during a business cycle. That is the basis of diversification. Investors then trim gains and re-invest the proceeds periodically to take advantage of varying price moves for the long-term betterment of their portfolios.
We at Fifth Third Private Bank have heard from many clients saying they have lost sleep because of their 401(k) or IRA accounts. The assets to help them retire five, 10 or 20 years down the road are now worth substantially less. In an attempt to recoup some of the value of their assets, they re-allocate often in reaction to the markets and hope for the best.
However, that type of “trading on emotion” is one of the most common mistakes individual investors can make during this time. Investors will try anything to stop the hemorrhaging. Unfortunately, there is no quick fix in restoring confidence to financial markets, which has been eroding over the past two years. Patience is truly a virtue during a period of contraction.
Now is the time to go back to the basics with your 401(k) or IRA account. Given the stress of the financial market, it is advisable to take another look at your overall financial plan and how your 401(k) or IRA fits into it.
* Step back and look at your time horizon. When do you want to retire? With your 401(k) or IRA losses will you have to add another three, four or five years to that horizon in order for your assets to rise in value?
* Look at your risk tolerance. How much are you willing to risk? If you are up at night fretting about how much you have invested, you are risking too much. Seek to comfort yourself mentally by incrementally shifting your asset allocation to calm yourself.
* Look at your asset allocation ranges. A conservative rule of thumb is to hold your age in fixed income securities. For example, a 40 year-old should invest 60 percent in equities and 40 percent in fixed income. Conversely, a 60 year-old should invest 40 percent in equities and 60 percent in fixed income. This is only a general guideline; a different allocation may better suit your specific situation.
* Have a deliberate rebalancing approach in mind. At Fifth Third Private Bank, we are finding most people are falling into two categories – trading just to trade or not trading at all. Seek to rebalance your portfolio on a semi-annual or annual basis to instill discipline in your investment decisions and take advantage of the benefits of diversification.
Finally, do not hesitate to ask for advice. A qualified financial planner/professional should give individual investors professional, unbiased assistance that will help them through business and investment cycles. We believe the next few years will likely see a re-incarnation of the markets and the financial system and a wealth management adviser should be able to help you make the most of it.
Once again, these financial times are extremely unique. Being deliberate and incremental in decisions involving asset allocation will help individual investors sleep a little easier during turbulent market conditions.
Stephen M. Sherline, CFP is senior vice president and director, Fifth Third Private Bank.
Fifth Third Private Bank is a division of Fifth Third Bank offering banking, investment and insurance products and services. Fifth Third Bancorp provides access to investments and investment services through various subsidiaries. Investments and investment services: Are not FDIC insured; offered no bank guarantee; may lose value; are not insured by any federal government agency; are not insured by any federal government agency; and are not a deposit. Insurance products are made available through Fifth Third Insurance Agency Inc. Fifth Third does not provide tax, legal or accounting advice. Please contact your tax advisor, accountant or attorney for advice pertaining to your personal situation. Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss.








