Allocations amongst “Friends”
There is no simple answer to the question, “What should my asset allocation be?” Not only is every person’s ﬁnancial situation unique, but people have preferences and things like the ﬁnancial markets are always changing. So how do we answer this very important question? Let’s look at a couple of scenarios using popular TV characters from the sitcom Friends. For example, the laugh out loud hilarious Joey Tribbiani is an actor in his thirties. He is not married and has no dependents. He tries to save and allocate enough money to his IRA each year, but it isn’t always easy for him to make ends meet. His annual income varies and can be lumpy.
How should Joey be allocating his assets? Hmmm? Well, he should grow his savings for retirement but in reality, he sometimes needs to dip into it to pay for living expenses. Also, when he is able to put some money away and invest it, he hates to lose! From one standpoint, since Joey has a really long time frame, and beyond his day to day living expenses doesn’t have any liquidity needs, the investments in his IRA can be aggressive. However, since the cash he needs to maintain to supplement his income is likely a large percentage of his overall ﬁnancial picture then his total allocation could look much less risky, probably even outright conservative early in his career. Joey also needs to be able to stay the course through market volatility in his retirement account, because reducing his risk when the markets fall could be more detrimental than choosing a less aggressive allocation initially…Eventually, Joey’s career takes off and he is earning more than he needs which would lead to a very different discussion about his asset allocation!
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