What Is A Good Asset Mix For Retirement?

Saving for retirement is at the forefront of nearly every investors’ mind. For most, making sure that their investments can last the entirety of their retirement can feel like a daunting task. A set-it-and-forget-it strategy ends up being the default for many, even if that means running the risk of lost gains that could come through a moderately more hands-on approach.

Retirement investors stand to benefit from building a portfolio with a strong asset mix. This means going beyond retirement savings plans and pensions in order to unlock potentially greater returns. A good asset mix for retirement should include a handful of portfolio staples like stocks, bonds, and investment funds, but it should also make room for long-term alternative investments that can deliver returns that the S&P 500 can’t.

If you’re looking to make the most of your investing, a good asset mix for retirement is essential. Here are some top picks to consider.

How to balance the right asset mix

Before we dive into the best asset mix for retirement, it’s important to understand the ideal ratio of investments within your portfolio. There are several schools of thought in terms of striking the right balance: in the past, advisors recommended the 60-40 rule. This maxim suggests that investors dedicate 60 percent of the holdings to stocks, and the remaining 40 to bonds. With this allocation, you would be able to reap the benefits of larger potential returns that come with stocks while still retaining a hedge against market volatility through bonds.

The sheer variety of investment options available to retirement savers has all but rendered the 60-40 rule obsolete. The rise of index funds, exchange-traded funds, and the overall approachability of alternative investments have all given investors a broader assortment of options. In fact, most of these other investments can outperform bonds, making them a more alluring option.

Nowadays, financial experts recommend a more tailored approach to retirement assets: an aggressive portfolio in the early years, followed by a more conservative stance as you get closer to retirement. How you allocate your investments should correlate with the amount of risk you’re comfortable with over time. With this in mind, here’s what you need to know about the ideal asset mix for retirement.

Stocks

If your retirement portfolio is an engine, then stocks are the fuel. Stocks help propel your portfolio’s growth versus more conservative holdings, such as funds and bonds. But just like with gasoline, stocks can be highly volatile.

Most financial wisdom suggests that the early years of retirement savings are the best time to lean more heavily into stocks. There’s time to make up for losses when they happen, and you can more easily recover from volatility since you’re investing for the long-haul. As you get closer to retirement, however, it’s usually best to shy away from stocks almost entirely. Otherwise you run the risk of wiping out years of value.

When selecting stocks, pay careful attention to diversification. Holding too many stocks can leave you vulnerable to diminished returns and a greater risk of losses. The same is true for holding a majority of your assets in one or two stocks. The gains that come along with a price surge are great, but your exposure to substantial losses is significant. Most financial advice suggests that investors should hold at least 15 to 20 stocks. More than that and you might end up over-diversified, meaning that your assortment of holdings may end up diluting gains on average.

Bonds

Although the 60-40 rule may not cut it nowadays, that doesn’t mean bonds can’t play an important role in the average retirement portfolio. Bonds still provide investors with a stable and steady earner in their portfolio. They may not make you outstanding gains, but they’ll deliver at their maturity date. That’s why investors have usually included some amount of bond holdings in their portfolio, even in some of the more aggressive allocation mixes.

That being said, bonds aren’t without their downsides or risk. For example, when interest rates are low, Treasury bond yields are low as well. In our current financial climate, bonds offer so little interest that they may not have much of an appeal to the average investor. Inflation can also eat away at the purchasing power of your bond returns if they’re outpaced by a less valuable dollar.

Treasury Inflation-Protected Securities, or TIPS, can help investors stave off the prospect of losing purchasing if inflation outpaces their bond’s return. TIPS bond rates float with the Consumer Price Index, which measures the cost of common goods. If the CPI increases, your bond’s yield will increase to keep up with inflation. However, if the economy undergoes inflation and deflation while you hold your bond, you won’t get to benefit from the increased interest rate and the additional money won’t get paid out at maturity. You’ll only end up with whatever inflation-adjusted rate is available at that time.

Investment Funds

Almost every investor is familiar with investment funds, be they mutual funds, index funds, or ETFs. These financial instruments allow a group of investors to pool resources to buy several investments, sharing gains and losses proportionately to the amount they’ve invested.

Mutual funds give investors the added confidence (and convenience) of having a professional manage the money in the fund. Index funds help investors capture gains based on the grouping of stocks in the S&P 500 or Dow Jones Industrial Average, which are just two among many indices out there. ETFs offer investors an opportunity to buy and sell shares of an asset much like a mutual fund, which may or may not include a fund manager.

Each of these options provides investors with an opportunity to capture stock gains, but without direct exposure to stocks. Funds can swap assets to maximize returns and minimize downside much more effectively than your average investor. Were you to do the same work on your own, you’d have to dedicate a significant amount of time to doing so with the same level of efficacy.

Funds can also come with disadvantages, however. Mutual funds come with manager fees that eat away at your earnings. Index funds keep pace with the overall market, but won’t deliver outsized gains. ETFs are a great option for getting quick diversification, but that comes at the expense of customization.

Alternative investments

The world of alternative investments has expanded in recent years. These assets can be a great addition to your existing retirement portfolio for several reasons: chief among them being their separation from the stock market. This means that most alternative investments enjoy a low correlation with market shifts, thereby shielding many of these investment types from the same kind of volatility seen on Wall Street.

Some alternative investments fit in a retirement portfolio better than others. Commodities, like gold, are known for providing a steady return on your investment over the long-term. Plus, gold tends to increase in value when inflation is on the rise. This gives you an additional layer of protection from lost value in your stocks, funds, and bonds. As you might expect, gold prices are also sky-high at present: a mere ounce of gold trades at almost $1,700 at present, meaning you’re not going to get a lot of this commodity for your dollar.

With gold as expensive as it is, many investors are looking for alternative investments that can offer the same stability and returns of gold—but without the sticker shock. That’s where farmland investing can be an excellent addition to your retirement asset mix. Farmland also enjoys a decades-long appreciation trend and, much like gold, fares well during inflation. Unlike gold, farmland investing also helps you grow your portfolio by delivering value across several revenue streams. You’ll receive a portion of the profit from when harvests go to market, as well as equity in the farm on the land itself.

The last word on a good asset mix for retirement

The ideal retirement portfolio accomplishes a few things: it sets you up for growth in the early years, locks in your earnings in the latter years, and grows by way of diverse holdings all the while. This means diversification is a must. Conventional investments can (and should) play a major role in your diversification strategy, but they’re far from the only options available.