Nearing Retirement what should be ideal Investment Portfolio Allocation?

An article by Varun Walia

As you near your retirement, your investment approach should change to a conservative kind and a sizable part of your accumulated wealth should seek secure returns in bonds, CDs, savings, checking accounts, and treasury bills. Asset allocation holds the key to limiting risk on your portfolio. Learn how to create a conservative portfolio if you are already retired or approaching the day soon.

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Asset Allocation of a Retirement Portfolio

Each and every professional investor knows the importance of proper asset allocation in long term investments. The approach behind asset allocation seems simple to follow but when you go about constructing an investment portfolio, choosing the right mix of asset ratios becomes an extremely challenging task.

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Large Cap US Stocks: These offer the opportunity to invest for consistent returns along with handsome dividend yield in most cases.

Mid Cap US Stocks: It’s apt to invest in select mid cap stocks as these investments generally yield higher returns than big players.

Small Cap US Stocks: These are the riskiest investments and someone nearing retirement should ideally avoid investing in them. But, such investments can yield mind-boggling returns for a good stock picker.

International Equities: These offer both, diversification to minimize risk and the potential of generating higher returns, if one invests in emerging market equities.

Investing in Bonds: Ideal investment for retirees, these offer maximum security. One can opt for a mix of bonds such as Investment Grade Bonds, Government Bonds, High Yield or Junk Bonds, and Municipal Bonds.

All the above mentioned investment instruments work best when you allocate your money in proportions that best suit for investment objective and risk tolerance.

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Conservative Asset Allocation: Low Risk Safe Returns

It makes no sense to advise someone on what kind of portfolio mix he should opt for as every individual has a different investment objective and circumstances that vary too. However, we an sort out investment classes based on historic return and volatility, and further make assumptions for various risk profiles.

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The best way to build a conservative portfolio and bag consistent profits is to opt of less volatile investments. However there is no guarantee, no matter which instrument you opt for. You can get assured returns on fixed interest return contracts only.

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Conclusion

While opting for a conservative portfolio it’s not necessary that you ignore stock market investments. The better way to go about it is to reduce equity exposure and keep a higher percentage of your portfolio in bonds. Keeping away from equities will paralyze your portfolio returns and it will get tougher to maintain your net worth as inflation will erode away a large chunk by the time you reach second phase of your retired life. So even after retirement, for first ten years you should keep 10% -15% of your investments in equity linked instruments.