Unfortunately, retirement savers seeking guidance on formulating an appropriate asset allocation may have a hard time knowing where to look. Sure, you could certainly do worse than adopting Jack Bogle's simple formula: 100 minus your age equals how much you should hold in stocks. But what if you want to come at the problem with a greater sense of precision? What if your personal situation puts you outside the norm--perhaps you're lucky enough to have saved far more than you'll ever need, or you've not saved enough and are playing catch-up?
Thankfully, you don't have to fly blind. Here are some key information sources you can turn to when crafting your own asset-allocation plan. You may find it useful to sample an array of different opinions; you're apt to find a comforting convergence among various sources of guidance on this topic.
How the Pros Do It
Target-date funds, which are designed as one-stop investments appropriate for your retirement date, are incredibly handy for do-it-yourself investors interested in building their own portfolios. Target-date funds offer a shortcut for helping to figure out how much is appropriate for someone like you to invest in different asset classes.
Looking at target-date fund holdings is like peering into what professional managers would do with your money. Once you have a sense of how different professionals would invest, you can take the parts you like and leave what you don't. It's important to take a look at target-date offerings from a couple of different fund companies--funds for the same retirement date can vary substantially based on glide-path philosophy and types of holdings.
Morningstar's Target-Date Fund Series reports
do a good job of summarizing the glide paths, as well as the pros and cons, of various target-date series. Some target-date programs maintain very high equity allocations before and even during retirement, a stance informed by the view that longevity risk--that is, the chance that you'll outlive your assets--should outweigh concerns about short-term fluctuations in an investor's principal.
Funds in T. Rowe Price's Retirement series
, for example, generally have above-average equity weightings relative to other target-date funds in that same age band. Meanwhile, other target-date fund series have steered a more conservative, bond- and cash-heavy course, in the view that big stock weightings add more volatility than most people need or want, which in turn could lead to panic-induced selling amid stock market downturns. American Century's LIVESTRONG series
, for example, is generally lighter on equities during the accumulation phase than most target-date series, though its portfolios maintain relatively higher equity weightings for those nearing or in retirement. Thus, sampling an array of opinions from target-date funds geared toward investors in your same age band can help get you in the right ballpark; Morningstar analysts' favorite series are those from T. Rowe Price, American Funds
, JP Morgan
, and Vanguard
Morningstar's Lifetime Allocation Indexes
, informed by the research of Ibbotson Associates, provide another vantage point on the asset-allocation question. In addition to providing separate asset allocations for various time horizons, the indexes also allow customization by risk profile for each age band: conservative, moderate, and aggressive. In addition, the indexes also show suballocations for various asset classes--they recommend percentage weightings in Treasury Inflation-Protected Securities and commodities, for example.