Determining Optimal Allocation

Every investor dreams of maintaining optimal allocation through each of their investments. We invest because we want to make money. If you put all your eggs in one basket, you could end up with a pretty big mess if something goes wrong. If you put all your investments in one area, you set yourself up for unnecessary risk. Too much risk means the potential for too great of a loss. If you’re nodding along to all those statements, you want optimal allocation among your investments. In it’s most basic form, optimal allocation is the perfect balance of risk and safety for where you choose to invest. This means diverse (yet balanced) stocks, bonds, and cash. These three main categories spider off into an abundance of sub-categories for your investments; large, mid, and small cap sized stocks, mutual funds, real estate, securities, 401(k)s & IRAs. The end goal of optimal allocation is a well-balanced risk vs reward system where you’re assets are primed for a profit, yet you’re protected in case of market downturns.

The balancing act of optimal allocation means you balance your high risk, high reward investments with low risk, low reward investments. This risk-return trade off is made more complicated by an investor’s risk tolerance. An investor who has 20+ years to wait out the fluctuations of the market can have an optimal allocation that sits heavier on high risk, high reward options than an 

investor who is within five or ten years of a retirement. A financial advisor can help you determine what your exact risk tolerance is for your optimal allocation, therefore determining which type of portfolio suits your needs the best.

There are a handful of factors that go into determining your optimal asset allocation. One of the most important factors for determining optimal allocation is return objectives. Return objectives are a plan for the funds you’ll need upon your retirement based on your current state of finances/investments, how much time you have until retirement and additional contributions you pla

n and ideal portfolio. Another major factor is your time horizon, which is essentially how much time you have to ride the market roller coaster before needing your money.n to make leading up to retirement.  Typically, the more time you have before needing your funds liquidated, the more aggressive your portfolio can be, thus affecting your optimal allocatio

The optimal allocation of your portfolio is not a constant state for each individual investment. Since most market fluctuations are small, changes to your allocations should be made no more than quarterly.  As assets increase or decrease in value, the risk associated with that investment could change. Keeping an eye on your portfolio and the way your investments fluctuate will aid in maintaining your desired optimal allocation.

The optimal asset allocation you have today will not be the same one you have in ten years. It’s important to start saving early, as the more time you have to endure the market fluctuations, the more open to bigger profits your investments can be. Optimal allocation is akin to investment risk management; it’s all about keeping your finances safe yet profitable. Schedule a free consultation with MyRetirementPlan to talk to us about setting up a portfolio that meets your individual needs.