Robins eggs

Blue robins eggs in a nest on a tree in Central Kentucky

In my last piece, I covered how the most important decision you’ll make for your retirement portfolio is how to allocate it across stocks, bonds, cash, real estate, and their sub-types. But how do you choose an allocation that makes sense for you? Here are three key questions to guide the way.

1. How much time do you have to invest? The longer you have until you need your money, the more you can allocate to stocks. Stocks entail the highest short-term price swings, but also provide the highest expected returns over longer periods. But because a temporary down stock market can show up any time, those expected returns can take quite a while to materialize. That’s why you need a long runway for your stock allocations—and the stamina to sit tight during turbulent times—so they can deliver as planned.

2. How widely can you diversify your investments? Diversification means you won’t ever hit the jackpot by finding that one winning stock. But you also won’t ever lose huge on a big bet gone sour. Broadly diversifying your investment risks in pursuit of the market’s overall expected returns offers a sensible approach for controlling how and when you can retire. Isn’t that the entire point? To effectively diversify, don’t just select what’s familiar. Invest in the U.S. and abroad, and in large and small companies, from both fast-growing and dividend-paying businesses.

3. Are you saving for retirement or spending in retirement? During your saving years, market volatility is your friend. When stock prices are low, you automatically buy extra shares for your same periodic investment dollars. Once you retire and are withdrawing money, market volatility can cost you. During downturns, you may have to sell more shares than usual to take out the same amount of monthly money. The market will eventually recover, but the extra shares you sold are gone and can’t participate. To combat this effect, it often makes sense to introduce volatility-reducing investments like bonds, cash, and commodities, especially in early retirement.

Of course, there is a lot more to retirement investing. But leading with these key questions can help ensure your retirement nest egg is optimized for you and your personal circumstances. That’s a great start.

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