Rethinking My Mix
ASSET ALLOCATION is usually a set-it-and-forget-it exercise. At least, that���s how I���ve handled it until now. I decided on my appetite for risk, then set my stock-bond ratio accordingly.
I tallied everything once or twice a year, and then rebalanced. I���d apply a portion of my winning positions to my less successful asset classes. Rebalancing this way forced me to buy low and sell high. Combined with dollar-cost averaging, it���s an investing approach that���s served me well for more than 20 years.
Each year, I���d also consider how much I wanted to keep in cash investments. Now that I���m semi-retired, I���d been looking to reduce my stock exposure and add to cash. At least that was the plan, until now.
The current ���transitory��� spike in inflation has forced me to me to rethink my entire approach. Here���s why: If the current inflationary bout should persist, my cash assets could lose nearly a quarter of their value over the next five years. This has me looking to trim my cash investments substantially, not add to them.
Next, I���m concerned about what life will be like 20 years from now. The remaining baby boomers will swell the ranks of the over-80 crowd. They���ll be selling investments to pay for health care and many other senior-oriented necessities.
The cost of these services has risen faster than consumer inflation for years. I don���t imagine that trend reversing now. The general investment selloff required to meet these expenses may depress returns for all of us.
This creates a dilemma as I weigh my asset allocation. Higher inflation means low���or negative���real returns on cash and bonds. I may be required to own more stocks just to have a fighting chance against that loss of purchasing power. Of course, that would increase my investment risk during retirement���not the usual approach.
Asset allocation, alas, is no longer a set-it-and-forget-it exercise for me.
I tallied everything once or twice a year, and then rebalanced. I���d apply a portion of my winning positions to my less successful asset classes. Rebalancing this way forced me to buy low and sell high. Combined with dollar-cost averaging, it���s an investing approach that���s served me well for more than 20 years.
Each year, I���d also consider how much I wanted to keep in cash investments. Now that I���m semi-retired, I���d been looking to reduce my stock exposure and add to cash. At least that was the plan, until now.
The current ���transitory��� spike in inflation has forced me to me to rethink my entire approach. Here���s why: If the current inflationary bout should persist, my cash assets could lose nearly a quarter of their value over the next five years. This has me looking to trim my cash investments substantially, not add to them.
Next, I���m concerned about what life will be like 20 years from now. The remaining baby boomers will swell the ranks of the over-80 crowd. They���ll be selling investments to pay for health care and many other senior-oriented necessities.
The cost of these services has risen faster than consumer inflation for years. I don���t imagine that trend reversing now. The general investment selloff required to meet these expenses may depress returns for all of us.
This creates a dilemma as I weigh my asset allocation. Higher inflation means low���or negative���real returns on cash and bonds. I may be required to own more stocks just to have a fighting chance against that loss of purchasing power. Of course, that would increase my investment risk during retirement���not the usual approach.
Asset allocation, alas, is no longer a set-it-and-forget-it exercise for me.
The post Rethinking My Mix appeared first on HumbleDollar.
No comments have been added yet.
