The way you invest changes with time. Your financial priorities in your 20s will look very different from those in your 60s, and so should your investment strategy. Asset allocation—how you divide your investments across stocks, bonds, and other assets—is one of the most critical factors in building a successful financial plan.
Let’s explore how your allocation should evolve with age to help you grow your wealth, manage risk, and secure a comfortable retirement.
Why Asset Allocation Matters
Asset allocation isn’t a one-size-fits-all strategy. Different types of investments carry varying levels of risk and return, and your personal tolerance for risk changes over time. Equities, such as individual stocks, often deliver higher returns but come with more volatility. Bonds, on the other hand, are generally considered safer but offer lower returns. Striking the right balance between these and other asset classes is essential to optimize growth while protecting your portfolio.
Asset Allocation by Age
Your asset allocation strategy should evolve as you progress through different stages of life. Here’s a breakdown of how to think about your portfolio at each phase:
Early Career (20s and 30s): Building for Growth
When you’re young and just starting your career, time is your greatest ally. With decades ahead to recover from market downturns, you can afford to take on more risk. A portfolio in this stage might be 80% to 100% in equities. This aggressive approach allows you to capitalize on the long-term growth potential of stocks. Equities historically outperform other asset classes over the long run, helping you maximize returns while spreading risk.
Mid-Career (40s and 50s): Balancing Growth and Stability
As you advance in your career, your financial responsibilities likely increase. You may have a mortgage, children’s education to fund, and retirement savings to grow. While growth remains important, stability starts to take precedence. A balanced portfolio might include 60% to 80% in equities and 20% to 40% in bonds. Bonds provide stability and help reduce the impact of stock market volatility.
Pre-Retirement (60s): Protecting What You’ve Built
As you approach retirement, the focus shifts to preserving the wealth you’ve accumulated. With less time to recover from market downturns, reducing risk becomes essential. Many experts suggest a 50/50 split between equities and bonds or even a 40/60 mix. While equities still offer growth potential, bonds provide a safety net, ensuring you have the funds you need when you retire.
Retirement: Prioritizing Income and Preservation
Once you’ve retired, often your investment portfolio’s primary purpose is to provide steady income and ensure your savings last. Portfolios in retirement often skew heavily toward bonds, with 70% to 100% allocated to fixed-income investments. Fixed-income assets provide predictable returns and help shield your portfolio from market fluctuations.
Key Considerations
Risk tolerance, time horizon, and regular rebalancing are critical factors to keep in mind when designing your asset allocation strategy. Periodically revisiting your portfolio ensures it aligns with your goals and adjusts as market conditions change.
Final Thoughts
Asset allocation by age is a cornerstone of effective portfolio management. By adjusting your strategy at every life stage, you can maximize growth during your early years, balance risk in mid-life, and preserve capital as you near retirement. Contact Berger Financial Group today to ensure your investments align with your goals and life stage.
