Question: I’m reading more and more about asset allocation. How important is it? --Michael, NJ
Answer: Michael, what would you say if I told you that the return you earn on your money has little to do with your ability to pick good investments (security selection)?
What would you say if I told you that the return you earn on your money has little to do with knowing when to buy or sell certain investments (market timing)?
What would you say if I told you that the vast majority of the return you earn on your money can be attributed to how well you divide up your money among the major asset classes – stocks, bonds and cash (asset allocation)?
When you realize that whether or not you achieve your retirement goals will depend, in large part, on how well you position your assets, I’d have to say it’s one of the most important decisions an investor can ever make. According to Ibbotson & Associates, asset allocation accounts for nearly 92% of your overall portfolio performance, with investment selection accounting for only 4% and market timing accounting for less than 2%. All other factors account for less than 2%. This clearly shows that how you allocate your money may actually be more important than the individual investments you choose.
Many people are led to believe that trying to “time” the market and picking the next “hot” investment are the keys to success in reaching their goals. They are sorely mistaken. The ultimate goal, of course, is a secure retirement. How soon you retire, how long the money will last, and in what style you retire can be greatly affected by your decision on asset allocation.
Bill’s Bottom Line: Normal market fluctuation will make your asset allocation change over time. Remember to rebalance your portfolio back to its target allocation at least annually (every six months is preferable).
Bill Losey, CFP®, CSA, America's Retirement Strategist®, is the resident retirement planning expert on CNBC’s “On the Money”. He has been named one of America’s Top Financial Planners and is the author of Retire in a Weekend! The Baby Boomer’s Guide to Making Work Optional. Bill can be reached online at www.MyRetirementSuccess.com.