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3 Questions to Fine-Tune Your Portfolio's Risk Level

Where you're employed, whether you have a pension, and your real estate holdings should all affect how much risk you take in your portfolio.

Christine Benz 19.12.2014

To determine if your equity allocation is in the right ballpark, Jack Bogle has shared the quick tip of subtracting your age from 100. Age--or rather time horizon--is also used as a key determinant of the allocations in target-date funds: The young investor with an anticipated retirement date of 2055, not surprisingly, gets a much larger dose of stocks than one retiring in 2015. 

Data bear out that time horizon should play a key role in determining how much risk to take in your portfolio. In more than 90% of rolling 10-year periods, stocks have ended in the black, giving the investor with at least a 10-year time horizon a good shot at making money over that holding period. But with shorter time frames, stocks aren't such a safe bet, losing money in roughly a fourth of rolling 12-month periods. ("Rolling" means that we don't just stick with calendar-year periods but also look at 12-month returns from Feb. 1 through Jan. 31, March 1 through Feb. 28, and so on. This method provides more observable time periods.) Those data suggest that people closing in on retirement should hold a buffer of cash and bonds to draw upon, in addition to holding stocks. 

But time horizon shouldn't be the only determinant of investors' asset allocations. And in any case, focusing on the investment portfolio without considering other important financial assets could leave an individual open to unwanted--and avoidable--risks. A recent research paper by Morningstar's David Blanchett and Philip Straehl asserts that the most successfully allocated portfolios consider investors' total wealth--human capital, pension assets (including Social Security), and real estate holdings, not just investment assets--when determining portfolio allocations. In essence, Blanchett and Straehl's research suggests that you think of your investment portfolio as your "completer portfolio," aiming to offset risks that accompany your other financial assets. 

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About Author

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz and on Facebook.

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