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How Aggressive Should My 401k be? (Asset Allocation Explained) - YouTube
Channel: Financial Awareness with K.Scholl
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Alright, so you're curious how to invest your 401(k), but not sure how aggressive your allocation
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should be. Ahhh, it's no problem. Spoiler
Alert though! It's not as hard as you think.
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You just need to be equipped with the right
knowledge and terminology and you'll be on
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your way. What's up guys, I'm KScholl. Welcome
to another Financial Awareness video. Over
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my 8 year time span as an Advisor this question
came up all the time. We'll go over a few
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things you need to consider so you make an
educated decision. Let's get to work!
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So, here's the deal. There's an easy way of
doing this and one that requires a little
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more effort. The easy way is simply to pick
the year you plan on retiring then go to your
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401(k) and re-balance all of your holdings
and your future contributions to what's called
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a Target Date Fund for that year. If you're
30 years old right now that might look something
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like a 2055 Target Date Fund. Boom. Done.
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Think of Target Date Funds as if you're already
flying the airplane and you hit 'auto pilot.'
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This won't help you with your landing, but
it will help you get from "Point A" to "Point
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B"...when I say 'landing' what I mean is the
Distribution Phase of your financial plan.
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Because right now you're probably still accumulating
your assets. If Target Date Funds are all
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you're looking for feel welcome to click out
of this video and go check out this one right
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here about different types of retirement accounts.
I'll give you a second to think about it.
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Ok cool. So if you're still watching and want
to learn more about asset allocation for your
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Risk Tolerance, Time Horizon, and Age then
the first thing you should be aware of is...seeing
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the forest through the trees. What I mean
is any of your friends or work colleagues
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can pick apart your 401(k) positions and maybe
point out some potential flaws, but YOU the
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investor need to be financially aware of how
the allocation of this account fits into the
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overall picture of your financial plan. This
can be further explained in an entirely different
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video about Modern Portfolio Theory. Hit that
subscribe button and stay tuned for that one.
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As an example, among other assets, my wife
and I have like 6 or 7 different types of
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retirement accounts and this is just one of
them. As you can see, we only have 0.50% invested
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in bonds and 99.50% invested in stocks & equities.
According to the Vanguard algorithm without
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knowing anything about my wife and I they
are suggesting we have 10% of our holdings
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of just this one account in bonds or fixed
income securities.
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Hey, quick question, what type of investor
are you? Let me know in the comments down
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below what type of investor you are. Aggressive,
conservative, stocks, real estate. I'm curious
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so I can plan out future videos that align
with your goals.
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Although that information from Vanguard is
helpful, if you don't have a financial plan
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then this could result in you making an uneducated
decision. Not necessarily a good or bad decision....just
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an uneducated one. Now, in all reality, we
have about 7.5% of our total assets held in
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fixed income - so that Vanguard example wasn't
too far off, but just like I've said in other
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videos - you need to give your retirement
dollars a job to do and let them do their
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job. Inside this account, for us, these dollars
are not supposed to be invested in bonds and
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the 0.50% that's there is simply a result
of one of the funds we own having a very small
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portion of their holdings in bonds. Remember,
now that you can see the forest, let's start
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walking through the trees.
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Ok, with that out of the way, the first thought
when considering how aggressive you should
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be is, TIME. In the investment world, this
is what's known as your 'time horizon.' For
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any account, your 401(k) in this example,
your time horizon is the amount of time you
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plan on keeping your money invested before
you anticipate making any withdrawals. Keep
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in mind though that once you arrive at your
destination of Retirement, you probably won't
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withdraw all of your money all at once and
you'll probably only pull out a little bit
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based on your retirement needs and goals.
This is what's known as the 4% rule. So you
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probably won't withdraw everything in one
lump-sum and you should take that into consideration
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when thinking through your time horizon. If
you have a long time horizon then you can
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financially and emotionally afford to take
on more risk at the beginning of establishing
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your investment. Because if something negative
does happen in the short term (cough 'pandemic'
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cough), then you can navigate through it or
hold your positions before actually pulling
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out any of your money. If you have a short
time horizon then just be financially aware
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of the risks that can pop up unexpectedly
without having the time to recover from such
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losses. After considering how much time you
have the next thing to consider is how MUCH
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you can save based on your personal budget.
To overcome many people's initial anxiety
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to start investing I started sharing a term
that popped into my mind one day called, "budget-based
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investing" All this simply means is that no
matter how much money you make you save or
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invest some based on your budget. Trust me,
if there's anything we've all taught ourselves
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over the past few months of 2020, it's that
with enough sacrifice you can adjust your
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lifestyle and spending habits if need be.
Also, while on the subject of how much you
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can afford to save you should decide which
of your investment buckets you want to fill
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up. You may not want to save as much to cash
if you already have an emergency fund. If
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you don't have a fully funded 3-6 month emergency
fund, you may want to save more to cash. This
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actually will protect your investments and
allow you to take more risk because if something
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bad happens to while the market is down, this
will prevent you from liquidating those investments
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just because you need some extra cash.
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So now you know your Time Horizon and how
much you can afford to save...the next thing
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to do is understanding the different allocations
and what they mean. Let's check out some pie
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charts.
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Ok, so, each of these pie charts represents
an asset allocation for either an individual
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account or how you overall as an investor
consider yourself. Without knowing the specifics
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of any one person's individual account or
financial plan I'll go over the different
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investing styles to shed a little more context
on each one. Ok, so Conservative or Moderately
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Conservative Asset Allocations as you can
see they are predominantly held in fixed income
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securities with 80% and 60% respectively.
I would say folks that fall into these categories
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are either emotionally scarred from a previous
investment experience and too timid to take
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on more risk OR maybe they're already in retirement
and they don't want to damage the golden goose
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that lays the golden egg so-to-speak to where
they care a lot more about preservation of
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principle, liquidity, and generating an income
off of this particular asset allocation. Ok,
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next up is the Balanced asset allocation and
as you can see we are trending down from 80%,
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60%, to now 40% held in fixed income. I would
say a Balanced Investor is a little bit on
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the fence. They want to take a little more
risk than a Moderately Conservative Investor,
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but don't want to jump neck deep into the
more aggressive asset allocation. They want
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steady and sustained growth and less volatility.
From a volatility perspective if you will
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just imagine the tip-top peak of the Rocky
Mountains and the very bottom, lowest point
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of the Grand Canyon. That measurement from
peak to trough is called volatility and a
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Balanced Investor does not want to experience
the high highs and does not want to experience
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the low lows. So when the stock market is
going really really well more aggressive people
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are happy and balanced people are ok, but
when the market goes down the more aggressive
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allocations are feeling every inch of that
drop and the balanced investors aren't feeling
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as low lows. So they're more comfortable with
that slow, rolling mountainside type of asset
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allocation and investment return.
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Aggressive allocations and Very Aggressive
allocations and investors actually have a
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lot in common. Both are looking for long term
growth. One has as you can see 20% of it's
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allocation invested in fixed income and one
has hardly any with only 2%. That being very
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aggressive. Although they both want long term
growth these allocations have different types
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of risk structures that they're willing to
take to get there. An aggressive allocation
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is willing to take reasonable risk to accomplish
that growth and a Very Aggressive investor
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is willing to take substantial risk. If you've
got two buddies and one is an aggressive investor
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and one is a very aggressive investor - I
would say these are the types of people that
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will argue over who has more 'alpha' in their
portfolio.
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If you want to learn more about which type
of investor you might be, I'll leave a link
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in the description down below to the Vanguard
Asset Allocation Tool. There is usually an
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evolution in your personal financial journey.
Everybody starts out as a beginner and novice.
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Over time, as you save money, live your life,
and build your wealth you knowledge will grow.
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Whether you're saving cash, paying off debt,
investing, starting a business, or buying
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real estate my hope through this channel is
to encourage you on your journey wherever
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you are - and for you to become more financially
aware of your personal financial decisions.
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Hence the name, "Financial Awareness with
KScholl." As your financial awareness and
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knowledge grow you'll become more equipped
to make better decisions that fit within the
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overall picture of your financial plan.
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Hey, thanks for watching appreciate your time.
If you have any questions for me, leave them
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in the comments down below. Thanks!
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