Why Cruise Control Doesn't Work in Retirement Planning

For example, if you use the classic formulaic allocation based on 100 minus your age and you're 60 years old, you would have 40 percent of your assets in stocks and 60 percent in bonds. This hefty a bond allocation may have been fine for a 60-year-old in 1985, when the bond market was growing apace.

But now that bonds are in a bubble and inflation may rise, this allocation could substantially reduce your retirement resources if a lot of these bonds have 20 years until maturity and are paying rates that may not keep up with the rate of inflation.

Just because the classic allocation formula dictated keeping a given slice of your assets in bonds years ago doesn't necessarily mean this is a good place to be now. Many investors fail to consider the time horizon trap when setting up their asset allocations. They love to refer to sound bites from professionals like Warren Buffett who is often quoted saying his favorite holding period is "forever."

But Buffett's firm, Berkshire Hathaway, isn't a person. Rather, it's an institution with an infinite time horizon because it has no set life span and no need for retirement resources.

Unlike an institution, when you're retired, you're no longer adding to your nest egg. Instead, you're probably decreasing it to pay expenses. Asset allocation is an important piece of your investment strategy. But it's not the Holy Grail. You should periodically reevaluate your allocation based on what's happening in the markets and the risks you may be facing in reaching your retirement goals.

Failing to do so can lead to disaster. The set- it-and-forget-it mentality is like putting your portfolio on cruise control and then pulling a Rip Van Winkle. If you decide to travel down this road, ignoring the hazards of each asset class, you could awaken in 20 years to find out that you only dreamed that your retirement planning was on track and that it's actually stuck in a ditch.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Craig J. Coletta has 20 years of experience in the financial industry. He is president of C.J. Coletta & Co., a Registered Investment Advisor firm, and president of Coletta Investment Research Inc. Coletta is a Chartered Financial Analyst charterholder, a Chartered Market Technician and a Certified Hedge Fund Professional. He holds a B.S. in accounting and business administration from Rider University, and is a member of the American Institute of Certified Public Accountants.

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