One of the most important pillars of a solid financial plan, is asset allocation. For most university professors, participating in the employee sponsored retirement plan is a good first step in addition to a owning few personal mutual funds. The challenge is that just “picking” a few mutual funds and “Letting it ride” may cause problems. As important, if not more important, is something called asset allocation.
What is Asset Allocation?
This is industry jargon for the mix of equities, fixed income, commodities and other assets that make up a mutual funds portfolio. Making sure that your mutual fun portfolio has the right mix and percentage of components will be the key factor in how successful you are in reaching your retirement goals. Below are some common mistakes university professionals make regarding asset allocation.
1. Overly Aggressive
By putting your funds in overly aggressive mix, you can subject yourself to serious risks and emotional errors. If you are closer to retirement, a sudden drop in the market could eliminate the growth you have accumulated over the years and wipe out significant gains. This may cause irrational buying and selling, such as selling off assets during drop in the market, (Selling low) or buying when prices are high.
2. Overly Cautious
In the same vain of being overly aggressive with your investment allocation, being too conservative will cause you to miss out on larger gains if your time horizon is longer. One of the biggest regrets of recently retired university professionals, is not taking advantage of time. One example of this is a friend of mine has kept their money into an overly conservative fund for the past 12 years. Since then, the market has increase almost 458% since 2009, and missing out on those gains. Because they were too conservatively invested, they only saw a 4% return where it average around 15% each year!
3. Rebalance Funds
This is the process of realigning your portfolio mix to the original allocation mix. This happens over time as markets move up and down and can cause them to be “unbalanced” compared to the original set allocation. Yearly rebalancing is typical for most investors and a smart thing to schedule. Most investment advisors can help you rebalance your portfolio. Having a plan and process for reviewing and rebalancing your funds will play a important role in how likely you are to hit your retirement goals.
If you have questions about this or interested in having a casual conversation about your own financial plan, please reach out! I would love to get to know you and how we could help.