What is the RIGHT investment mix?

The question “What is the ideal mix of investments for someone retiring at 65?” is not a reasonable question to ask in the first place. It could be analogous to asking “What’s the proper medication for a person age 65?” or “What car should I have now that I’m 65?”

A number of investment companies have developed mutual funds that are designed based on answering the silly question. They are called target retirement date funds. The intent is to have the mutual fund company change the asset allocation to a more conservative mix, as a person gets closer to retirement.

One problem is each investment company has a different perspective as to what is a proper allocation at the various stages. Please note the differences for the follow 2025 target date funds for the following companies:

  • Vanguard – US Stock 61% Non US stock 15% Cash and bonds 23% Other 1%
  • T Row price – US Stock 60% Non US stock 20% Cash and bonds 19% Other 1%
  • Fidelity – US Stock 52% Non US stock 19% Cash and bonds 28% Other 1%
  • Putnam – US Stock 36% Non US stock 20% Cash and bonds 42% Other 2%

The main folly with this target date approach is that basing the allocation on a retirement date fails to address the underlying factors that should determine the proper allocation.

A client’s asset allocation in their portfolio should be based on three factors,

  • Risk tolerance (their mental ability to withstand down markets)
  • Capacity for risk (their financial ability to withstand down markets)
  • Goals (which would include their time frame)

Unfortunately all target retirement date mutual funds allocations are based solely on the date of retirement. This methodology target date approach fails to address the 2 major factors determining the proper allocation for that individual. The result could be more risk than the person should have in their investments.

Clients with at least $10,000 of investments are better served by having an allocation across different asset class custom designed for their situation.

The only situations where target retirement date funds might be appropriate is in a retirement account that has very few choices to construct an appropriate portfolio or the client has a very small amount of investments to work with or the client does not know where to go to get help to have the proper custom designed allocation.

Michael Chamberlain is a Calif. Registered Investment Advisor. Send your questions to him at mike@chamberlainfp.com or call (800) 347-1340.

About the author

Michael Chamberlain, CFP®

Hello. My name is Michael Chamberlain CFP®, the principal of Chamberlain Financial Planning and Wealth Management. Our firm is “fee-only” with offices in Sacramento, Campbell and Santa Cruz California. “Serving clients from the mountains to the sea.”

Our mission is to help clients realize their full potential today while planning for an abundant tomorrow through comprehensive financial planning and collaborative decision-making.

As an experienced investment and planning professional, I have had the privilege of being interviewed by and contributing to hundreds of articles in such publications as Money Magazine, Financial Planning Magazine, ABC.com, Forbes.com, Nerdwallet, NASDAQ.com, Yahoo Finance and more.

I hope that you spend some time at the FiGuide site and learn more about the financial matters important to you. To learn more about our firm, visit our website www.chamberlainfp.com or give us a call at 800-347-1340.

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