Whether we like to admit it or not, we are all getting older. I’ve noticed that different parts of my body have started to hurt that never hurt before. I’ve also found I must follow more strict diet and exercise regimens to continue to feel fit.
Just as your body gets older and requires different strategies to stay healthy, the way your assets are allocated within your investment portfolio must be adapted and tweaked as you reach different stages in life. Also similar to physical health, there is no-one-size-fits-all treatment for everyone. Rather, there is a specific set of individual guidelines and strategies that will best suit you and your unique needs.
That’s why, rather than recommending strategies for asset allocation by age, I’d like to break down asset allocation by stages of life, or investment stages. In doing this, you can decide for yourself what stage you’re in, rather than trying to force yourself into a strategy that doesn’t fit just because you are in a certain age group. After reading this, I recommend you meet with your executive financial advisor to determine which asset allocation strategies will be most effective for your investment portfolio.
Learn more about the Carpenter Team’s integrated asset allocation services.
The Stages that Affect Portfolio Asset Allocation
The three main stages, or investment life cycles, that we see when working with top-level executives are growth, preservation, and income. Let’s take a look at these life stages in more detail and some corresponding asset allocation strategies that go along with them.
Growth
If you are currently building your wealth and don’t plan to retire within the next 10 years or so, you are likely in a growth stage when it comes to your investments. This is a stage in which you want to explore investment opportunities that have the likelihood to generate larger returns over the course of 10 years or more. However, these investments may also experience volatility during that time frame.
A general asset allocation strategy for this season of life is typically to own more equity holdings than fixed income. For example, you might have a portfolio of 50-80% stocks, including your employee-owned stock holdings. The caveat to this strategy is that you must be aware of your concentrated stock position as a top-level executive. Often, we see C-suite employees owning 50% or more of their portfolio made up of their employer’s stock.
One way to counteract this is to explore an exchange fund strategy, which allows you to diversify your concentrated stock position across numerous other stocks without having to sell your concentrated position, therefore avoiding a large capital gains tax incident.
Growth & Income
During this stage, you may likely find yourself within 10 years or less of retiring from your executive position. You may be considering starting a side business or doing some consulting work. The importance of this investment stage is that you need to preserve the wealth you have built for yourself, whether you plan to utilize some of it to springboard into your own business or just generate future retirement income from your investments. During this time, you can’t afford to weather a market downturn of 20% or more due to the gains needed to replace that lost wealth.
As far as asset allocation strategy is concerned for the growth and income stage, you may consider investing half or more of your portfolio in fixed assets, such as bonds, to avoid large market losses during these years. As a top-level executive, it can be difficult to transition from the growth stage into the preservation stage, especially when you have accumulated a large concentrated stock position. This is due in part to the challenge of selling off your stock in a way that minimizes taxation. However, certain sell-off strategies can be implemented with the help of an advisor to make this transition over a set time frame, such as 18 months.
Income
The income-generating stage is where you find yourself when it comes time to use your wealth as income rather than savings. If you have accumulated real estate, a pension, Social Security, or other assets that can generate retirement income, you may never need to tap into your investment assets. However, in today’s day and age that is rare, and you may need to generate some portion of your retirement income from your investment portfolio.
When it comes to asset allocation for the income stage of life, it is a critical time in which you need the guidance of a wealth manager who has aided clients in generating income while also preserving their wealth as much as possible. Depending on your unique situation, you could allocate up to 100% of your portfolio in fixed-income assets and short-term money market accounts. If you need access to a certain amount of income within the next 6-12 months, it might make sense to park your portfolio in a money market or similar account to limit market risk exposure for that particular amount.
Identifying Effective Asset Allocation by Age
At the end of the day, your asset allocation strategy will depend on more than simply your age. Your life stage, your financial goals, along with a host of other factors must be considered. This is why it is imperative to work with an expert who understands your financial situation and has experience implementing asset allocation strategies for top-level executives. This can help you feel confident you’ve implemented the most effective methods to achieve financial success now and into the future.
K. Wade Carpenter, CFP®, AIF®, ChFC®, CLU®, is an innovative wealth manager serving corporate executives and entrepreneurs from coast to coast. Throughout his more than 25-year career, Wade’s focus on C-level clients has made him a top strategist for asset allocation for high-level executives.
SCHEDULE A CONVERSATION
