Optimizing Asset Allocation to Retire Early

Asset allocation is the strategy of choosing which asset class to invest in amongst bonds, equities, cash equivalents, etc.  Essentially it is the same idea as not putting all your eggs in one basket!  Asset allocation is said to account for over 90% of a portfolios return variability over time.

Different asset classes historically have provided differing levels of return over time, therefore diversification of asset classes is key to reducing the variability of your portfolios returns.  Choosing the right mix of asset classes is done by assessing your particular level of risk tolerance.  A portfolio of 100% equities could cause you to panic and sell of your entire portfolio at the wrong time if your risk tolerance does not allow for the swings in equity values.

The most important part of asset allocation is to choose a plan that’s right for you and stick with it.  Two asset allocation strategies you may choose to adopt are strategic asset allocation and tactical asset allocation.  When using strategic asset allocation you establish your base portfolio weights of asset classes.  Then the portfolio is rebalanced at specified intervals to meet the original target weights.  Tactical asset allocation involves taking advantage of short-term market inefficiencies.  This involves an element of market timing but allows you to participate in the market when you feel a particular sector is going to outperform.

So whats the best asset allocation mix for you?  Its best to speak to your financial advisor about your time horizon and investment goals so that he/she can help you decide your asset mix.  If you don’t have an advisor you can use an online tool like this one to help you determine your asset mix.

http://www.ipers.org/calcs/AssetAllocator.html

Asset allocation is a vital component in any retirement plan!  Follow these simple steps and they will help you along your way to an early retirement!

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