Flipping Rich

There are typically two main asset allocation strategies — market-based and client-based. Market-based reacts to prevailing market trends. The most popular client-based asset allocation models include age-based (for example: take 100 minus your age, that’s the percentage of equities you should have in your portfolios.   For my 5-year old, for instance, he should be 95% in equities and 5% in bonds.), strategic (base on risk tolerance), and graduated (modified version of the age-based). Here’s an example of the graduated model: if the investor is 35 years away from retirement, the portfolio typically would start with 85% in equities and gradually pull down to 25% by age 65. Fidelity’s Freedom funds are designed with the graduated model in mind.

Of course, the million-dollar question is — what is the difference between these three? If you plug in $10,000 in the retirement calculator going back to 1900 using the historical performance date for the S&P 500 index as a proxy for equity performance, there’s virtually no difference in the outcome between these three strategies! It goes without saying — there’s more than one way to invest, or as some people would say “there’s more than one way to skin a cat”.  However, all things being equal, missing one year’s contribution will have a significant negative effect on the outcome than choosing the “wrong” allocation strategy.   So the bottom line is, it doesn’t matter which strategy you choose, just be sure you save regularly – time is money!