(PUB) Investing 2016

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17 Morningstar FundInvestor February 2016
when determining your portfolio’s asset allocation. Do
you have a track record of running for the exits when
the going gets rough for your stock portfolio? If so,
consider nudging your equity allocation down a bit and
your cash and bond cushion up relative to recomended
allocations for investors at your same life stage to
improve the odds that you’ll stick with the program in
periods of volatility. Just remember that a more
conservative portfolio may necessitate changes else-
where in your plan—for example, the lower your
equity weighting, the lower your withdrawal rate
should generally be.
4 | Not Factoring in Nonportfolio Income Sources
The reason that making one-size-fits-all asset-alloca-
tion recommendations is so difficult is that no one but
you knows all of the pieces of your financial life.
(This is why a financial advisor can be so valuable, in
that he or she can make recommendations based
on your own variables.) One of the biggest factors that
can affect an individual’s asset allocation, both
leading up to and during retirement, is the presence
of other in-retirement income sources, above and
beyond what the portfolio will supply. Here, I’m talking
about Social Security or pensions, mainly, but fixed
annuities as well.
If those stable income sources will supply most or all
of your needed income in retirement, your risk
capacity (see above) is high and you should be able to
withstand a higher equity weighting, at least in
theory. Retirees with limited stable income sources, by
contrast, will need to batten down the hatches
with the parts of their portfolios they’ll spend within
the next several years. They’ll need higher weightings
in cash and bonds.
5 | Not Factoring in Nonretirement Goals
In a related vein, successful asset-allocation plans
should take into account other goals—in addition
to providing cash flows during retirement—that you
have for your portfolio later in life.
A common example of such a goal would be to
leave assets behind for children, grandchildren, or
charity; individuals for whom this is a priority
will generally want to maintain a more equity-heavy
posture in their long-term portfolios than individuals
who aren’t aiming to make bequests. Not only do
they have a greater incentive to make their portfolios
grow, but they also have a longer time horizon for
their assets than investors who are using the “last
breath, last dollar” approach to portfolio management.
(Of course, some retirees view their homes as the
chief asset that would eventually be sold to benefit
their heirs; a desire to make that type of bequest
wouldn’t have an impact on the positioning of the
investment portfolios.)
6 | Having a Fuzzy View of Your Asset Allocation
If you hold individual stocks and individual bonds,
or your portfolio consists entirely of index funds,
it’s easy to keep tight rein on your portfolio’s asset
allocation. But maintaining oversight and control
over your portfolio’s asset allocation can be trickier if
you hold actively managed funds. That’s because
what you see isn’t always what you get. Domestic-
equity funds may hold foreign stocks, bond funds
may be hoarding cash, and allocation funds may shift
their stock/bond weightings around. Your portfolio’s
asset allocation may not be what you thought it was.
Morningstar.com’s portfolio X-Ray function can
help solve this issue by letting you view your portfolio’s
actual allocations, based on the composition of your
holdings. For investors who own actively managed
funds, they’re often surprised by their large cash
weightings in the X-Ray view. That cash is apt to give
the portfolio better downside performance than
if it were fully invested, but it isn’t available to serve
as spending money or your emergency cushion.
For that reason, it makes sense to consider your cash
needs for near-term expenses—bucket one in
my bucket framework—apart from what you see
in X-Ray. K
Contact Christine Benz at