Building an Investment Portfolio

By Mitchell J. Smilowitz, CPA

As a JRB plan participant, you’ve taken the first step in investing for a financially secure retirement. But, are your retirement savings working effectively? Do they adequately balance your need for financial growth with an acceptable amount of risk?

Asset Allocation

Financial planners agree that a diversified portfolio – a selection of investments that includes a variety of asset classes – is an effective strategy for generating long-term returns while managing risk. The most important factor in reaching your retirement goals is how much you save. The second most important factor is your asset allocation. The way you divide your portfolio among stocks, bonds and stable value investments has a major impact on your ability to reach your financial goals.

Diversification has several benefits.

No single asset class produces the best returns year in and year out. While stocks have historically turned in the strongest performance over the long term, they have recorded major losses in some years (think about 2008) and been flat in others.

  • Bonds and stable value investments can moderate the impact of stock market volatility.
  • It would be great to have your money in the asset class that’s doing the best at any point in time. Unfortunately, however, market timing is impossible. Timing the market requires that you pull your money out of an asset class before the market declines AND that you reinvest your money before the asset class begins to recover. Missing these dates by even a few days can have a major negative impact on your portfolio.

Your goals, your age and your tolerance for risk all affect your asset allocation.

  • Reaching your retirement goal may require a larger contribution during your working years, a more appropriate asset allocation or both.
  • Age matters because the younger you are the more risk you can generally afford to take. The more time you have before retirement, the more time you have to make up for short-term losses.
  • Age also matters because the longer you have to invest, the longer you have to benefit from the effect of compound interest. Compounding is the result of reinvesting the interest and dividends earned on your principal. With compounding, your balance grows faster because future earnings accrue on the interest and dividends you’ve already earned.
  • Your asset allocation should change over time. We mentioned it above, but it bears repeating – the younger you are, the more aggressive your portfolio can be because you have more time to make up for short-term losses. A review of model asset allocation portfolios shows how your asset allocation should change by both age and your comfort with risk. Note that even the conservative model asset allocation portfolio for those aged 21-40 invests 55% in equities. On the other hand, for those over 65, the most aggressive model portfolio contains only 40% in equities.

Developing a portfolio capable of meeting your investment goals requires establishing an asset allocation strategy. To find an asset allocation that fits your needs, contact the JRB via email or call 888-JRB-FREE (572-3733).