Risk tolerance, time horizon (the period between now and when you actually retire) and asset allocation – you’ve dealt with these factors for a good part of your life, but now, in the face of retirement, they take on a more urgent and significant role. These factors – particularly tactical asset allocation – are vital to maximise your assets before retirement.
A different take on risk tolerance and time horizon
As your time horizon shrinks rapidly while you progress towards your retirement, your risk tolerance lowers accordingly. These two factors dictate not only your plans for each asset you own, but also your portfolio in general. Use risk tolerance and time horizon as principal factors to readdress your portfolio because it’s time to tip the balance.
Leverage tactical asset allocation
It’s time to ramp up percentages of income generating assets and minimise the number of growth inducing ones.
Let’s say you have five years to retirement; income generating assets can be maximised during this time horizon by assessing short term investment opportunities and tactically investing heavily in assets that are sure to be influenced by macro and micro economic factors.
Now is also the time to reassess which of your growth assets you should retain beyond retirement. Retirement will ideally afford you more time to enjoy life’s pleasures, like playing golf and travelling, so you’ll want to make sure you’re financially set up to actually afford them. You probably want to be a lot less busy in your retirement than you were when you were working. Choosing only a couple of your best growth investments allows you to do just that. This move allows for more income investments and tactical asset allocation to maximise the time horizon you have remaining.
Going from strategic to tactical is a shift of long term planning to short term thinking – what economic or financial factors during your time horizon would affect which assets? Invest more heavily in them while you still have time. Free up more long term assets to focus on the short term time horizon and re-balance your portfolio after retirement. If the generated return of each tactical allocation increases by a favourable percentage, you’ll have a more prosperous retirement to look forward to.
Gearing up for the tactical shift
Tactical asset allocation requires a semi-active approach, especially when your time horizon shortens. A passive style of strategic portfolio management protects itself from market shifts by gaining justifiable long-term returns instead of tolerating more risk, which might result in more loss a decade or two down the line.
When shifting to an active style of portfolio management as you approach retirement, changing your passive, strategic mindset may prove more taxing than you imagined.
Even for successful professionals, the notion of finality that retirement brings can be daunting. You wind up wondering if you have enough in your portfolio, if you’ve done enough with your investment strategy and whether you need to do more. Tactical asset allocation is a savvy move if you want to maximise your assets just before retirement and, best of all, it requires only a change of mindset and investing patterns.
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