Asset allocation. It sounds like a dry subject, but the reality is this topic will make or break almost every financial decision of your lifetime so pull up a chair and sharpen your pencil.
Life stage planning is exactly what it sounds like; if you are a retiree or boomer nearing retirement then your financial planning will consist of one of the following:
- Preservation. Assuming you have a tidy nest egg then your emphasis will be on maintaining the purchasing power of your investments despite inflation.
- Go For Broke. If you are like the unfortunate majority of retirees or near retirees with minimal to no savings or investments then you might take a "go for broke" approach to investing. What do you have to lose right? Not so fast. The reality is inflation is likely to eat away what little you expect to receive from Social Security or a pension so having even a few hundred dollars extra each month might make a very big difference in your standard of living. Don't assume your only option is to bust the bank and speculate on one big win.
Life stage planning for the younger generation has an entirely different set of issues. First, forget Social Security. Everyone admits it is broken and once the current Boomer generation gets into full swing there won't be enough money to fund their retirement much less yours. As for pensions, they are quickly becoming extinct. Even if you are fortunate enough to have a company sponsored pension, don't put all your eggs in one basket...look at Enron to see how quickly that can turn sour. Instead, you need a long term strategy that incorporates growth combined with security.
The good news is that time is on your side. Growth investments will predominate your portfolio but always set aside a low to no-risk secure investment area for the worst case scenario" to assure you have something to start-over with or at least fund a subsistence existence in your old age.
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There isn't a one size fits all approach to asset allocation but keep these tips in mind:
- Diversify Investments to make sure you are never "wiped out".
- Don't risk what you cannot afford to lose. Even if you are young, the first objective is to have a safety net in place. Government Savings Bonds, CD's and other low risk investments are the first tier. Once those are established then move on to higher risk investments.
- Real Estate or REIT's provide another level of diversification especially when inflation is a risk.
- Commodities including precious metals might benefit your portfolio but are highly volatile.