Prioritize Allocation Over Location When It Comes To Investing

Prioritize Allocation Over Location When It Comes To Investing

If you are attempting to invest your capital on your own, perhaps in a 401(k), be sure to focus first on the allocation of the assets rather than the location. By allocation, financial professionals are generally referring to the equity/debt split that makes up a portfolio construction.

For example, for decades, the traditional balanced portfolio for many individuals has been the 60/40 portfolio. This means that the portfolio is allocated to 60% equity holdings (stocks) and 40% debt holdings (bonds). If you are younger and more risk tolerant due to your extended time horizon, a 90/10 or 80/20 portfolio allocation is likely more in line with your goals and abilities. On the other hand, if capital preservation is your primary concern and growth is less of a necessity to achieve your financial goals, than a 20/40 or 40/60 split may be the proper allocation for you.

Remember, fixed income (bonds) are generally the stabilizing asset class in the portfolio. While 2022 was an anomaly, with historically negative returns for fixed income investments, it is unlikely for this occurrence again in the short term, as interest rates are presumed to be near their rate hiking peak by the Fed. (Remember, when interest rates increase, the underlying bond value decreases, and vice versa). Stocks are the growth side of the allocation equation, generally providing that long term appreciation of account values over time.

While the underlying investment is important, the first thing to figure out is your equity/debt split in your investment portfolio. If you are investing in a 401(k), an easy and effective way to manage this allocation question is to choose a target date fund (TDF) that estimates the year in which you will retire. Simply pick the year you plan to retire and choose the target date fund with that corresponding year; the allocation will change for you based on rule-of-thumb metrics as you age. While not perfect, this is a great way to choose your investment in your employer provided plan.

Scores of companies have similar products available, and with so many mutual funds and ETFs to choose from, many can be suitable. Make sure the allocation is decided first and foremost, and then decide the location. #allocation #financeeducation #baltimore

Consult your financial professional for more information.

-Your friends at Red Oak Financial Group