Going conservative in today’s market

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Q. The stock market has done great this year, but I’m invested conservatively with only 40 percent in stocks. Should I make changes? I’m 55 and I plan to work for another 10 years.
— Trying to decide

A. Paying attention to your asset allocation is important, and this will change over time.

Let’s also note here that everyone is different, so this answer will give you something to think about rather than dictate what you should do.

Investors have different goals when it comes to their wealth, said Michael Green, a certified financial planner with Wechter Feldman Wealth Management in Parsippany.

“Some people save for a specific purchase, like a car or house, while others invest towards their retirement years,” Green said. “The ultimate goal of investing is to achieve the objectives that will allow one to have what they define as financial security.”

Everyone’s definition of financial security is different because everyone’s financial situation is unique.

For example, Green said, one person might need $75,000 per year in retirement while someone else may only need $50,000 per year.

Because of those differences, investment allocation is not a one-size-fits-all strategy.

“This is why deciding how to properly invest your money is one of the most critical aspects of one’s financial plan,” he said. “Investment allocation should never be based on a single factor, such as age.”

You might have heard it said that younger individuals tend to invest more aggressively because they have a longer time horizon and can afford to take on more risk, so they have a higher risk tolerance. Following this logic, Green said, an older investor has a shorter time horizon — especially once that individual is retired — and would be risk averse or have low risk tolerance, Green said.

The concept of risk tolerance is at the center of any investment plan or recommendation, and should be considered before making any decision.

As important as risk tolerance is, there are certainly a number of other considerations that come into play. You need to decide when you will need the funds, Green said.

“This is significant because if your time horizon is relatively short, risk tolerance should shift to be more conservative,” he said. “When there are longer term goals and objectives, there is room for more aggressive investing.”

Be careful, however, about blindly following conventional wisdom, Green said. Don’t think that a 65-year-old investor must shift everything to conservative investments such as certificates of deposit (CDs) or Treasury bills.

“While this may be appropriate for some, it may not be for all,” he said. “With today’s lengthening life expectancies and advancing medical science, the 65-year-old investor may still have a 25-year or more time horizon.”

Another important concept in the investment allocation process is diversification, which is making sure you don’t have “all your eggs in one basket.”

Green said diversification is not necessarily intended to boost performance, but it may provide the potential to improve returns for your specific level of risk over time. Once the appropriate level of risk is determined based on your goals, time horizon and risk tolerance, you will be in a better position to properly diversify your portfolio, he said.

To build a diversified portfolio, you should start by determining the overall asset class allocation that is appropriate for the level of risk you are willing to take — equities, fixed income, and cash/cash equivalents — whose returns are typically not correlated and move in different directions, Green said.

“This way, even if a portion of your portfolio is declining, the rest of your portfolio is more likely to be growing, or at least not declining as much,” Green said. “Diversification can potentially offset some of the impact that a poorly performing asset class or investment can have on an overall portfolio.”

About this year, the stock market has indeed rallied, but past results are not always indicative of future performance.

Given that you’re 10 years from retirement, it’s the ideal time to engage with a financial professional to map out your financial future.

Consider meeting with a certified financial planner, or taking advantage of the free money makeovers at NJMoneyHelp.com.

Email your questions to moc.p1540243934leHye1540243934noMJN1540243934@ksA1540243934.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.