Asset allocation: needs to reflect your risk profile
You think you know your risk profile. Some combination of time constraints and how averse you are to volatility, right? Not exactly.
True, time constraints play a big part of it. The farther out your time-frame, the more you need to be concerned about inflation and longevity risk.
And true, we need to match your emotional makeup and be risk averse if you are.
But there’s another dimension to your risk profile. It’s your actual savings behavior. If you habitually maintain a good 6-9 months “emergency funds” in case of job loss, then you can afford to be riskier with your investments. But if you’re the type who doesn’t have a good cushion, then we need to be more cautious with at least part of your portfolio.
That’s why a good financial planner wants a clear picture of your expenses and your savings rate. That’s why I like to put you on Quicken.com or Mint.com so we can get a good snapshot of your lifestyle, where the data is collected automatically by the software (it queries your credit card and bank accounts.)
Your risk profile is a composite drawing. A good planner doesn’t just go by age and your own self-assessment. The real picture is more complex.
Mike Dayoub is a fee-only planner in Alpharetta/Milton and a tax preparer at H&R Block. 770 361-3139 website
