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Finding the right ratio: How about going from 60/40 to 70/30? For a financially sound investor, it could feel less risky; However, a potentially better, albeit boring, answer to increasing stock exposure might be to not do it at all. Many financial advisors view low interest rates, bond yields and the possibility of higher inflation as a threat to retirees, and as a result recommend keeping more savings in stocks for bigger returns. Ultimately, this also means more risk, and a recent study is debunking whether or not that extra exposure is worth it.
Forecasting efficiency: The study, titled “The Unimportance of Asset Allocation in Retirement Planning”, focuses on a hypothetical couple trying to decide between a mix of 60 percent stocks and 40 percent bonds versus a 75/25 split. Upon running Monte Carlo simulations for each asset allocation, the results over a 30-year period show less than a $3,000 difference between each asset mix. Additionally, the ways in which each ratio performs over thousands of varying market scenarios actually overlaps.
For what it’s worth: While some might sway toward going with a 75/25 mix if the outcome is similar to that of a 60/40, the end determinant comes down to a potential heavy price tag: Risk. The only guarantee with this selection is more volatility, and if cementing confident cash flow in retirement is a concern, taking risk off the table might just be worth a better night’s sleep.
Push forward and prioritize: It’s easy to get hung up on seemingly pivotal decisions that are relatively insignificant in the end. There will be bigger issues in retirement than minor changes in your asset allocation mix. Make sure those that matter get the attention they deserve.