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Published: Saturday 24 August, 2013

designer fashion outlet designer fashion outlet ?Should I include retirement funds in calculating my asset allocation

You see, my investments have an asset allocation. But then, so do my retirement savings definedcontribution pension fund and a retirement annuity. Combining investments and retirement funding gives an overall networth asset allocation.

If I were to follow an asset allocation such as 60% equity, 25% bonds, 15% cash is that supposed to be allocation for just my investments, or the sum of my investments and retirement funds?

A classic example is your emergency fund which has a potentiallyimmediate time horizon vs. your retirement savings. The emergency fund would be all in cash or very shortterm bonds, and would not count in your retirement asset allocation. Since the emergency fund usually has a capped value a certain amount of money you want to have for emergencies rather than a p designer fashion outlet ercentage of net worth value, this especially makes sense; you have to treat the emergency fund separately or youd have to keep changing your asset allocation percentages as your net worth rises hopefully with respect to the capped emergency amount.

Similarly, say you are saving for a car in 3 years; youd probably invest that money very conservatively. Also, it could not go in taxdeferred retirement accounts, and when you buy the car the account will go to zero. So probably worth treating this separately.

On the other hand, say you have some savings in taxdeferred retirement accounts and some in taxable accounts, but in both cases youre expecting to use the money for retirement. In that case, you have the same time horizon and goals, and it can pay to think about the taxable and nontaxable accounts as a whole. In particular you can use asset location put lesstaxefficient assets in taxdeferred accounts. In this case maybe you would end up with mostly bonds in the taxdeferred accounts and mostly equities in the taxable accounts, for tax reasons; the asset allocation would only make sense considering all the accounts, since the taxable account would be too equityheavy and the taxdeferred one too bondheavy.

There can be practical reasons to treat each account separately, too, though. For example if your broker has a convenient automatic rebalancing tool on their website, it probably only works within an account. Treating each account by itself would let you u designer fashion outlet se the automatic rebalancing feature on the website, while a more complicated asset location strategy where you rebalance across multiple accounts might be too hard and in practice you wouldnt get around to it. Getting around to rebalancing could be more important than taxmotivated asset location.

You could also take a keepitsimple attitude: as long as your asset allocation is pretty balanced say 40% bonds and includes a cash allocation that would cover emergencies, you could just put all your money in one big portfolio, and think of it as a whole. If you have an emergency, withdraw from the cash allocation and then rebuild it over time; if you have a major purchase, you could redeem some bonds and then rebuild the bond portion over time. When I say over time Im thinking you might start putting new contributions into the nowunderallocated assets, or you might dollarcostaverage back into them by selling bits of the nowoverallocated assets.

Anyway theres no absolute rule, it depends on whats simple enough to be manageable for you in practice, and what separate shorterhorizon investing goals you have in addition to retirement.

You can always make things complex but remember that a simple plan that happens in real life is better than a complex plan you dont keep up with in practice or a complex plan that takes away from activities youd enjoy more.

Id imagine that its a small portion of the population that can have much of both.

If one is saving a decent amount for retirement, say 1015%, they arent likely to have much else, aside from the house if included.

For example, when I look at my pie chart I get Retirement 72%, House 22%, everything else 6%. money funds CDs, etc and the rest invested long term. The short need money isnt part of the long term asset allocation, to be specific.

A young investor has been working on their retirement planning for a few years now, and has a modest amount of retirement savings say $15,000 allocated carefully according to one of the usually recommended schemes. stocks, with smaller exposures to small cap, international and bond markets.

Years before however, they mad an essentially emotional investment in a struggling manufacturer of niche personal computers, which then enjoyed something of a renaissance and a staggering growth in shareholder value. Lets say their current holdings in this company now represent $50,000.

At the same time, if we switch the account balances, the investor might be reassured that their asset allocation is fine and diversified, even though the assets th designer fashion outlet ey have access to before retirement are entirely in a single risky stock.

In neither case is the investor well served by combining their funds when figuring out their allocation especially as the goal allocations may very well be different. designer fashion outlet