GROUPIRA Learning Center

Education, strategies, and tools for our Members to invest better for whatever comes next in life.

Does Your Investment Strategy Work for You?

A common frustration of the financial services industry is the use of jargon that confuses people. An investor’s “asset allocation strategy,” is one example of financial services industry jargon. In simple terms, an asset allocation strategy answers the question: How do I invest my account balance? There are good and bad asset allocation strategies. The best strategies accomplish two things:

  • diversify investments, to reduce risk
  • provide suitable investment return potential, relative to your personal situation

Risk means the possibility of losing principal -- the amount you invest. Every investment has risk. Even keeping money in a bank account has risk. How? If your bank fails, and the U.S. Government does not guarantee your entire account balance, you may lose your money.

However, not taking suitable risk can be just as bad. Why? Over time, money loses purchasing power because the costs of goods and services generally rises. This effect is known as inflation. We see inflation everywhere. Inflation is why a can of Coca-Cola cost $0.05 in 1950 and about $1.00 today. If your investment returns exceed inflation, then your purchasing power increases over time.

There are many ways to measure inflation, but a good estimate is the U.S. Consumer Price Index. Historically, the average annual change in the U.S. Consumer Price Index has been slightly more than 3%. This means that if a can of Coca-Cola cost $1.00 today, we could reasonably expect it to cost $1.03 one year from now.

Investments with greater risk tend to provide greater investment return potential. Equity investments (ex. stocks and stock funds) provide the greatest return potential, but also carry the greatest risk. Fixed income investments (ex. bonds and bond funds) are generally less risky than stocks, but do not tend to provide as much investment return potential. Cash equivalents, such as money market funds, are generally the least risky asset class, but also provide the least opportunity for investment returns.

Investors with asset allocations weighted toward riskier investments are said to have a more aggressive asset allocation strategy. Conversely, investors with asset allocations weighted toward less risky investments are said to have a more conservative asset allocation strategy. Investors with a relatively even split of higher risk and lower risk asset allocations are said to have a balanced asset allocation strategy. As an example, below is one investor's asset allocation strategy.

Asset Class

Years to Retirement

40+

40 to 20

20 to 10

10 to 5

5 to 0

Equity Investments (Stocks and Real Estate)

100%

80%

60%

40%

20%

Fixed Income Investments (Bonds)

0%

20%

35%

50%

65%

Cash Equivalents (Money Market)

0%

0%

5%

10%

15%

Total

100%

100%

100%

100%

100%

Notice the asset allocation change from an aggressive asset allocation strategy to a conservative asset allocation strategy as the investor approaches retirement. Generally, investors closer to retirement should take less risk with their asset allocation strategy because they have less time to recoup potential investment losses. Likewise, investors further from retirement can assume more risk for potentially greater returns.

Knowing your retirement horizon is important before developing your personal asset allocation strategy. In addition, you should always consider investment objectives, risks, charges, and expenses before investing. If you would like to learn more or review your specific situation, our IRA Consultants are happy to assist.