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Time for a retirement asset allocation checkup

June 8, 2009

My overall retirement investment strategy has been to select an asset allocation consistent with my risk tolerance and my age, and invest in an appropriate mix of mutual funds. Then, in the words of the Beatles, I just "Let It Be."

By Vickie Bajtelsmit, J.D., Ph.D., professor of finance

Perhaps, you would have thought that, because I'm a finance expert, I would have a large portfolio of individual stocks that I regularly buy and sell at a profit, allowing me to retire a very wealthy woman at a young age. Maybe you imagined that I could employ special analytical skills to ferreting out gems that could survive the market downturn untarnished. Sorry, but no.

Better off with diversified portfolio

I truly don't think that it's possible to be a consistently good stock picker, even if I had the time, which I don't. Yes, occasionally people get very lucky. But for every winner, there are losers. So, on average, I'm still better off with a diversified portfolio of mutual funds.

Let's suppose you've heard this advice before and you've been good and left your investments alone for the past year. You probably cheated just a little bit, like I did, occasionally taking a peak to see how bad a hit you had taken. And it's been bad!

Annual checkup recommended

Even with a "Let It Be" strategy, it's a good idea to give your portfolio allocation a little check-up now and then. When market prices change dramatically, either up or down, it's easy for your asset allocation to drift away from your original intent. Like your doctor and dentist, I recommend an annual checkup, perhaps with the new year, or your birthday, or some other milestone that makes sense.

As a simple example to illustrate allocation drift, suppose that you began with $200,000 in your 401(k) before the market downturn at age 50, and your asset allocation strategy was to invest 120 percent minus your age, in this case 70 percent or $140,000, in a diversified stock mutual fund and $60,000 in a money market mutual fund. In real life, you probably have several more asset categories, such as real estate, bonds, international stocks, annuities, etc. You should include all of your investments when evaluating your portfolio allocation, even if they are from different employers, IRAs, or non-retirement savings accounts.

Stick to the plan

In this example, suppose your stock fund declined by 25 percent over the past year, and the money market fund increased by 3 percent. Your new account value would be $105,000 in stocks and $61,800 in the money market, for a total of $166,800. Notice that your overall portfolio decline was only 17 percent because you were diversified with the money market account.

Notice that, after the market decline, your portfolio is no longer 70 percent in equities. You now have $105,000/$166,800 in stocks, only 63 percent. Your knee jerk reaction might be: "Good, because I don't want that much risk anymore." However, if you originally had determined that 70 percent -- actually 69 percent since you're now one year older-was the desired allocation, then you should stick to the plan.

Don't get out of whack when market rebounds

Most people, at least those of us who "Let It Be", have seen stock allocations go down over the last year. We probably aren't yet at the bottom, but stock prices are lower than they've been in a decade, so it's not a bad time to buy. With most 401(k) providers, it's easy to go on line and change the allocation across funds or the allocation of new contributions.

And when the market rebounds, be sure to do another checkup to make sure you don't get out of whack in the other direction. 


Editor's note: This column is by Vickie Bajtelsmit, J.D., Ph.D., a professor of finance at Colorado State University and the author of two books on financial planning: "The Busy Woman's Guide to Financial Freedom" and "Personal Finance: Skills for Life." Opinions expressed are those of the author and do not necessarily represent the views of the university.

Originally published in the Coloradoan, May 30, 2009.

Contact: Vickie Bajtelsmit
Phone: (970) 491-0610