16. Adjust your asset allocation as you age.

16. Adjust your asset allocation as you age.

As you age you will need to adjust your asset allocation. When you get closer to retirement you want to ratchet down risk and build up your stable investments. If you experience a set back in your 20's you have plenty of time to recover. If you get hit in your 60's it will lower the income you have in retirement. You may even have to work longer. 

Since I have a slightly above average risk tolerance I set my stable investments to my age. I let it get a little equity heavy as I progress until I hit the 5th year of that tolerance level. I do this to add a little bit of risk tolerance to my portfolio. I am 41 years old and my current asset allocation is 60% Equities and 40% Stable investments. I will keep this allocation until I hit 45. 

At age 45-50 my asset allocation will be 55% Equities and 45% Stable.
At age 50-55 my asset allocation will be 50% Equities and 50% Stable.
At age 55-60 my asset allocation will be 45% Equities and 55% Stable. 
At age 60-65 my asset allocation will be 40% Equities and 60% Stable. 
At age 65-70 my asset allocation will be 35% Equities and 65% Stable. 
At age 70-75 my asset allocation will be 30% Equities and 70% Stable. 
At age 75-80 my asset allocation will be 25% Equities and 75% Stable. 
At age 80-85 my asset allocation will be 20% Equities and 80% Stable. 
At age 85-90 my asset allocation will be 15% Equities and 85% Stable. 
At age 90-95 my asset allocation will be 10% Equities and 90% Stable. 

When you re-balance your portfolio it's a great time to check your asset allocation and adjust for your increasing age. Your risk tolerance may change over time as well. The rule of thumb is to set your stable investments to match your age. If you have more risk tolerance you can subtract 10% from your age, If you are more pessimistic about equities you can add 10% to your age. These are extremes in risk tolerance. I would not in percentage exceed + or - 10 of your age. 

In your 50's you may want to start trading in bond funds for individual bonds. The reason for doing this is that individual bonds have a face value that you can count on. A bond fund can theoretically lose all of its value. Individual bonds add even more stability to your stable investments. Some financial advisers prefer individual bonds for life. While this would be ideal, the individual bonds would require more homework or an adviser who is adept at bond picking. More on using a financial adviser when nearing retirement in future posts.