Building a custom portfolio: Age and time to retirement

The amount of time left until you retire may be the most important factor to consider when deciding how to allocate your portfolio investments. Volatility, or the degree of fluctuation of a given security’s value over time, is a bigger risk in the short-term than in the long-term. 

For example, if you’re retiring in 30 years, the volatility of your investments will likely have less of an effect than if you were to retire in the near future. With a long time horizon, your portfolio generally has time to recover and bounce back from a market crash, but if you’re retiring in, say, five years, a market crash or recession could seriously impact the amount you end up having in retirement. A market crash near retirement could mean that your account doesn’t have time to bounce back before you start withdrawing from it.

The following are general guidelines on how to apply time until retirement to your asset allocation:

  • If you have 5 years or less until retirement, a more conservative portfolio of mostly defensive assets, such as cash, bonds, and alternatives, is generally appropriate.
  • If you have 5 to 10 years until retirement, a healthy mix of both defensive and growth assets will continue to grow your portfolio while still reducing volatility.  
  • With 10 or more years until retirement, a more aggressive portfolio of mostly growth assets would be more prudent, since there’s plenty of time to recover from any short-term market volatility.

See this article to learn more about other factors to consider when building a custom portfolio.

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