Objectives & Risk

The first step to determining an asset allocation strategy and appropriate mutual fund recommendations is to determine your investment preferences and objectives. Select a mix of mutual fund categories to build a diversified portfolio.

The investment life cycle stage, portfolio size, total return objective, and risk tolerance all influence your asset allocation mix.

It is important to determine your investment stage. You accumulate assets during your career. Growth-oriented strategies tend to generate higher total returns than income-generating strategies. You can preserve your capital as retirement approaches by employing a balanced income and growth strategy.

At retirement, maintaining a stable principal and generating income are likely priorities. Capital growth is also important to protect your acquiring power against inflation.

Keep in mind that your time horizon and portfolio return objectives should guide your investment strategy.

Portfolio size

The size of your portfolio is another way of describing the amount of money you have in it. With a larger portfolio, you are able to choose a greater number of funds and a greater amount of diversification.

Time horizon

Generally speaking, a time horizon refers to the length of time you plan to commit to an investment strategy, e.g., when you plan to withdraw most or all of your funds. Your investment objectives may change over time. For instance:

  • A short-term time horizon is one to three years.
  • An intermediate-term time horizon is three to five years.
  • A long-term time horizon is more than five years.

Return objectives

Return objectives are determined by your (1) capital growth potential as well as (2) current portfolio income yield:

In a growth-oriented return objective, you emphasize the potential for growth of capital over current income. This objective is for long-term investors only.

In a balanced-oriented return objective, you emphasize capital growth and current income in equal parts. This return objective is appropriate for an intermediate or long-term investor.

In an income-oriented return objective, you emphasize current income over capital growth potential. This strategy works for all time horizons.

Risk tolerance

Risk tolerance correlates with your ability to withstand market volatility. Unrealized gains and losses may result from price fluctuations. A stable market tends to cause fewer fluctuations. A volatile market tends to cause more fluctuations. A lower total return expectation generally accompanies less volatility.

As risk levels increase, volatility and total return potentials tend to increase as well. Do considering diversifying your portfolio why less volatile assets such as gold IRAs. For in depth articles on these subjects, go to how to rollover a 401k plan to a gold IRA or what are the best gold IRAs companies.

Any risk tolerance — conservative, moderate, or aggressive — can match with a growth, balanced, or income-focused returned objective (subject to time horizon restrictions). To recap:

A conservative risk tolerance accepts lower portfolio returns to reduce risk.

A moderate risk tolerance accepts average fluctuations in the pursuit of higher total returns.

An aggressive risk tolerance accepts above-average value fluctuations to achieve above-average total returns.

Select your investment strategy from the following guidelines:

Just Starting (age 25-40) — Growth-oriented return objectives over a long-term time horizon

Established Earner (age 41-55) — Growth-oriented return objectives over a long-term time horizon

Soon-to-Retire (age 56-65) — Balanced-oriented return objectives over a long-term time horizon

In retirement (ages 65+) — Income-oriented return objectives over a long-term time horizon

Intermediate and Short-Term investors — Best suited for income and/or balanced return objectives