How Much Stock Should I Own? Adjusting Your Stock Allocation with Age

As you navigate through different stages of life, your financial needs, goals and risk tolerance evolve. One key aspect of maintaining a healthy investment portfolio is regularly reassessing and adjusting your stock allocation to align with these changes.

Here at Advance Capital Management, we understand the importance of tailoring your investment strategy to suit your unique circumstances. This is the foundation of our investment management service, which we provide to all clients.

In this article, we’ll explore how your stock allocation may need to change as you age and offer some practical guidelines to help you make informed decisions.

Understanding stock allocation

Stock allocation refers to the percentage of your investment portfolio that is invested in stocks. Stocks, also known as equities, represent ownership in a company and offer the potential for higher returns compared to other asset classes like bonds or cash.

However, they also come with higher volatility and risk. Striking the right balance in your stock allocation is crucial for achieving your financial goals while managing risk.

The role of age in stock allocation

Age is a significant factor in determining how much stock to own. It influences how much time you have to work, save, and invest, as well as when you will need to start using those funds to support yourself in retirement.

In this section, we provide general guidelines on how your stock allocation might change with age. These guidelines are based on typical risk tolerance and investment horizons at different life stages.

But it’s important to remember that everyone’s situation is unique. Your specific circumstances, financial goals and risk tolerance should always be taken into account when making investment decisions.

Early Career (20s and 30s): Growth Phase

In your early career, you have a longer time horizon until retirement, which allows you to take on more risk in exchange for potentially higher returns. During this phase, your portfolio can benefit from a higher allocation to stocks, as you have time to ride out market volatility and recover from potential downturns.

Guideline: Consider allocating 80-90% of your portfolio to stocks, with the remaining portion in bonds or other low-risk assets.

Mid-Career (40s and 50s): Balancing Growth and Stability

As you move into your 40s and 50s, your investment horizon shortens, and you may begin to prioritize preserving your wealth while still seeking growth. This may be a good time to start gradually reducing your stock allocation and increasing your exposure to more stable investments.

Guideline: Aim for a balanced approach with 60-70% in stocks and 30-40% in bonds or other low-risk assets.

Pre-Retirement (60s): Preserving Wealth

In the decade leading up to retirement, your focus should shift towards preserving the wealth you’ve accumulated. Reducing your stock allocation can help protect your portfolio from market volatility as you prepare to start drawing on your investments.

Guideline: Consider reducing your stock allocation to 40-60%, with the rest in bonds and other low-risk assets.

Retirement (70s and Beyond): Income and Security

During retirement, the primary goal is to generate a steady income while preserving your capital. A more conservative approach is generally recommended to minimize the risk of significant losses. However, your portfolio still needs growth to outpace inflation, so it may not make sense to lower your stock allocation too far.

Guideline: Depending on your situation and needs, a stock allocation of 20-50% may be appropriate, with the majority of your portfolio in bonds and other low-risk, income-generating investments.

Other key factors to consider

While age is a major factor in determining your stock allocation, it’s not the only one. Here are some other considerations that are also important to keep in mind:

• Risk Tolerance: Your personal comfort level with market fluctuations should influence your stock allocation. If you’re more risk-averse, you might prefer a lower stock allocation even in your younger years. Learn more about your risk tolerance here.
• Financial Goals: Your specific financial objectives, such as saving for a home, funding education, or planning for retirement, will impact your investment strategy.
• Income Needs: Your need for regular income from your investments should guide your allocation. Retirees, for example, often prioritize income over growth.
• Market Conditions: Economic and market conditions can influence your allocation decisions. Periodic reviews with a financial adviser can help you stay on track and make adjustments as needed.
• Your Other Assets: The presence of other assets can impact your stock allocation. For instance, if you have a pension, you might be able to take on more risk and allocate a higher percentage to stocks in your portfolio. Conversely, if your other assets are also riskier investments, you might want to be more conservative with your stock allocation.

Bottom line

The right stock allocation for your portfolio is a dynamic process that should adapt to your changing life circumstances.

At Advance Capital Management, we’re committed to helping you navigate these changes and make informed investment decisions. Regularly reviewing your portfolio and consulting with a financial adviser can ensure that your investment strategy remains aligned with your goals, risk tolerance and time horizon.

Remember, the key to successful investing is not only choosing the right investments but also maintaining the right balance over time.

If you have any questions or would like personalized advice on your investment strategy, please don’t hesitate to schedule a free financial consultation today.