By KIRK G. AGUER
As you move through the different stages of life — buying a home, starting a family or retirement — your investment needs change. There are times when you may be willing to increase investment risk in seeking to capture growth opportunities. Other times, you may want to decrease risk in seeking to secure a steady flow of income. Does your portfolio represent your current needs? If not, you may want to consider updating your asset allocation strategy.
Spreading your money across various types of investments is called diversification. Asset allocation is a strategy to help you effectively diversify your portfolio among asset classes, including stocks, bonds and cash/money markets. Your allocation strategy is an important factor influencing your portfolio’s return as well as risk, perhaps even more important than the actual investment selected. Also it is important to remember that asset allocation and diversification do not assure a profit or protect against a loss.
CHOOSING YOUR ASSET ALLOCATION MODEL Your strategy or model should depend on whether your primary need is to produce income or to grow the value of your investment. For example, a retirement portfolio will not need to produce income until you retire. Therefore, depending on your tolerance for risk and time frame, your model might focus on growth until you are near retirement. This situation might call for an aggressive growth model with the majority of your portfolio in stocks, a sizable amount in bonds and the remaining in money markets.
After retirement, you might shift some of your stock allocation into bond or money market holdings to provide the income stream you will need. You might keep some portion of assets in stocks in seeking growth to help outpace inflation and to help fund your later years.
REFINING YOUR MODEL ALONG THE WAY Your asset allocation should change as you reach different stages in your life or as you approach your goals. The key considerations will be the level of risk you are willing to take on,the rate of return and income you require and your investment time horizon. With this information, you can develop a personal model with the goal of controlling risk and helping you to meet your goals.
Your financial advisor can recommend an allocation model that meets your individual goals and circumstances and help you refine it as needed.
This article is published for general informational purposes and is not an offer or solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your specific circumstances and objectives. Morgan Stanley does not render advice on tax or tax-accounting matters to clients. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Clients should always check with their tax and legal advisor before engaging in any transaction involving IRAs or other tax-advantaged investments. (Kirk Aguer is a financial advisor at Morgan Stanley. To reach him, call his Santa Monica office at (310) 319-5220 or e-mail Morgan Stanley DW Inc., member SIPC.)
Originally published in the Santa Monica Daily Press print edition on July 6, 2006. Read the original PDF.